What does gilt yield drop mean for pensions?

Following the UK’s shock vote leave the EU and clear signals by the Governor of the Bank of England yesterday that more monetary easing is in store, 10-year gilt yields have fallen to a record low level today. David Smith, director of financial planning at Tilney considers how this will affect savers approaching retirement.

What does gilt yield drop mean for pensions?

While so far the stock market has defied some of the most apocalyptic predictions made during the Referendum campaign, there has nevertheless been a flight to perceived safe havens, including UK gilts.

As prices have nudged higher, yields have crumpled. With a very clear signal that further interest rate cuts are on the cards, and possibly another round of Quantitative Easing (QE), UK gilt yields are now at an all-time low.

As pension annuities are directly linked to gilt yields, the amount of income a retiree can secure from their pension has already fallen significantly and a further QE stimulus will only serve to compound the problem.

Final salary pension schemes have too felt the wrath in the wake of Brexit with funding deficits widening on a daily basis, increasing the risk of insolvency for employers and wind up of the scheme itself. Cash savers are likely to be hit with lower interest rates for longer and investors who are looking for a safe haven are presented with high costs and low yields.

So what can be done?

Savers must not panic. Those approaching retirement in the near term should perhaps consider delaying for a period or perhaps looking to alternative forms of retirement instead of an annuity. For example, taking withdrawals via flexible drawdown or buying a third-way annuity that can provide a fixed income for a short term, ultimately delaying the decision to conventionally annuitise.

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