Workers hoping to retire by the end of the year may face up to a four per cent cut in payouts. Experts studying the situation say that market conditions could cause benefits to decline by December unless matters turn around soon.
A four per cent decrease will mean that £100,000 pensions investment benefits would decline from about £6,000 a year today to about £5,760 by December, according to research group Capital Economics. Since the early 1990s, annuity rates in the UK have dropped 15 per cent often causing people to put off retirement.
Quantitative easing hurts annuity rates
When the Bank of England prints money, it places downward pressure on annuity rates. Governor Mark Carney plans further quantitative easing in the future if the economy does not improve significantly. That could mean more difficulties for people planning to retire in the near future. They can decide either to take the annuity with reduced payments or to wait until rates turn for the better.
However, future prospects do not look inviting, according to financial experts. For example, the UK government backs annuities with government bonds known as gifts. The current return rate on these gifts determines the benefit rate for pensioners. Because inflation in Britain is falling, many analysts believe that return rates on the 10-year government bond could slide by about 0.5 per cent by the end of the year. The reduction would cut annuity rates by four per cent if we use past models as an example.
A drop in rates could spell trouble further down the road as it could take months or years for payout rates to bounce back.
Proposed State pension changes
The pensions administration is proposing to introduce a flat rate (single–tier) state pension starting in April 2016. Additionally, it will raise the state pension age from the current 66 gradually to 67 in the more distant future between 2026 and 2028. Parliament, though, must agree to these changes before they become law. If the changes should come into effect, current pensioners along with those who start receiving their pensions before the introduction of the flat rate system will continue to receive their benefits using current rules.
The changes to the state pension age are two-fold:
- People born between 6 April 1960 and 5 March 1961 qualify for state pension between 66 and 67
- People born born on or after 6 March 1961 qualify for state pension when they reach 67 or older.
In related news, a recent report by the Office of National Statistics shows that people living in affluent areas could receive £67,000 more in state pension because of differences in life expectancy.
People living in poor areas and working manual jobs can die up to 10 years earlier compared to their more affluent counterparts. The situation may only get worse with the increase in the state pension age proposed by the benefits administration.
The jump in the state pension age will mean that many people will need to work longer only to receive lower benefits when they finally retire. The flat rate pension plan will also place those living in poorer areas at a great disadvantage, according to the Trades Union Congress (TUC).
TUC general secretary Frances O'Grady suggests that the government should scrap its plans to raise the state pension age and to implement a single-tier system.
Lory is a HR Consultant with a wealth of experience working with international organisations. You can find Lory's most recent articles and opinions on The Consulting Cafe. You can also catch up with her on Twitter: @LoryJackson83
Image: http://upload.wikimedia.org/wikipedia/commons/e/ec/Department_of_Work_and_Pensions%2C_Hanover_Way_-_geograph.org.uk_-_114907.jpg
References:
http://www.express.co.uk/news/retirement/426256/Millions-to-face-new-pensions-misery-as-payouts-are-slashed
https://www.gov.uk/changes-state-pension
http://www.dailymail.co.uk/money/pensions/article-2404574/Affluent-receive-67-000-state-pension-poor
