20 years ago, 10-year government bond yields were 8%, 10 years ago it was 5.2% and now it sits at 1.35%. The sharp drop in income from government bonds has had a significant impact on investors, particularly those in retirement.
The rate at which your pension pot is converted into an annual income is based in part on the 10-year government bond yield – not bad when it sits at 5.2%, even better when it peaked at 12% in 1990. But not when it falls to below 2% as the Eurozone endures a prolonged period of record low interest rates forcing pension savers to lock in extremely low levels of income for life.
Most pension savers must now actively considerer the purchase of an Approved Retirement Fund [ARF] instead of the traditional annuity.
Bonds and cash traditionally provide the safest sources of income and safety is very important to savers in retirement. However, with bonds and cash paying next to nothing, retired investors have been forced to look at investments in other asset classes such as equities, real estate and alternatives in their search for an income yielding return. The lack of guaranteed income products available in retirement and the fact that many pension savers do not understand investment risk, is a serious issue.
In their zeal to access higher growth, many pension savers have taken on portfolio risk without understanding what they are exposed to and what any sudden shocks might mean for their future financial wellbeing.
This is the time when it is really important to consult a financial broker who will help you address the following:
- What pension [guaranteed income for life] will I receive from my pension pot and can I live on that?
- What rate of return will I get from my ARF and can I live on that?
A pension is guaranteed to be paid no matter how long you live but your ARF money could run out if you live too long; fail to invest for sufficient growth or lose a substantial portion due to collapsing markets.