How to secure income in a world of low yields

The low yields on bonds mean you may need to consider other ways of generating income for your retirement, says David Prosser.

Pension-fund deficits continue to hit new highs not because their investments are underperforming, but because government bond (gilt) yields have fallen to all-time lows. Most pension funds use gilt yields to calculate the value of their liabilities (the benefits they've promised to pay in future) and lower yields mean bigger liabilities. The combined deficits of the defined-benefit (DB) pension schemes run by FTSE 350 firms rose by £70bn in August to a record £189bn, according to actuaries at Mercer.

This may not sound relevant to you if you don't have a DB pension and instead rely on a personal pension or other kind of defined contribution (DC) pension but it is. While you may not value your own "liability" the income you need in retirement in the same way, you are potentially caught in the same trap. The lower yields go, the larger the fund you'll need to build up to get the retirement income you want by buying an annuity (because annuity rates are essentially set off the back of gilt yields).

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David Prosser
Business Columnist

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.