Financial advisers have been reporting that risk-averse clients are looking for guaranteed income from their pension funds, rather than accepting the uncertainties of income-drawdown schemes.
Annuities, which pay a guaranteed income for life in retirement, have fallen out of favour since the pension freedom reforms, with drawdown plans becoming much more popular. Many savers prefer the flexibility of drawdown arrangements, even though these carry more risk.
However, annuity providers have seen a three-fold increase in applications for certain types of annuity in recent months, with advisers suggesting that many clients have been spooked by the pandemic-related market volatility.
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Such a response is understandable, but could prove costly. One market impact of Covid-19 has been a sharp rise in the price of gilts, regarded as a safe-haven asset by many investors; this has meant a corresponding fall in gilt yields, to which annuity rates are closely linked.
As a result, the average annual standard annuity income is now 5.3% lower than at the start of the year. Pension savers may be locking into rates at the worst possible time.
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.
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