Retirement savers should reassess their financial strategy as traditional ‘safe’ pension investments have been turned topsy-turvy by the Bank of England printing more money to control interest rates and inflation.
The traditional retirement plan was to invest in equities early on and then to gradually switch to less risky cash and gilts as the date for giving up work approached.
Then, the pension fund would transfer to an annuity aligned with longevity expectations aimed at giving a fixed interest income for life.
But, says Ros Altmann, a pension expert and former government retirement adviser, says the Bank of England’s quantitative easing program has undermined this philosophy.
She claims the £375 billion program has reduced the price of gilts, which has reduced the growth in pensions and at the same time made annuity rates plunge. Annuity contract rates are based on investments in gilts.
Topsy-turvy risk factor
“Assets that were looked upon as low risk are more risky thanks to the Bank’s policy,” she said.
As an example, she explains a pension fund investing £10,000 in 15-year gilts in August last year would have lost 8% in value in 12 months.
The resulting problem for many retirement savers is monolithic and slow-moving pension providers have designed their plans around the equity to cash and gilt to annuity strategy.
However, retirement savers are tending to shy away from annuities and pension investment options are less of a good-fit to their long-term plans.
“The result of the policy is low risk gilt prices are distorted with less of a return and more risk attached, while equities are losing their risk factor as that of gilts increases,” she said.
“A fund moved out of equities into gilts now does not necessarily face less risk.”
Personal financial responsibility
Many retirement savers paying annual management charge would be surprised to find out that a computer takes them out of equities into cash and gilts at prearranged times during the term of the product.
However, shifting out of equities is now probably the opposite of what they want to do.
Altmann suggests that because people are living longer in retirement that the risk putting their cash into equities can be absorbed for many more years and that considering a bolt to safety in cash and gilts could wait for some years after retiring.
“Setting a retirement date and then working past it is not a mistake,” she said. “It just means a change of plan and taking on personal financial responsibility.”
