Baby boomers face pension shock

by Bob Bullivant on 12 October 2011  |  10 comments
Tweet

In the space of a few short years the retirement awaiting the baby boomer generation has turned ugly. So what should they do?

Much has been written about the golden era of those born after the war - the so-called baby boomers. Who would have thought ten years ago that this period would be starting to look a little tarnished today?  

Post-war baby boomers have, in ten short years, gone from looking forward to a comfortable retirement to one that looks far less attractive. Stock market returns have been poor to the point where those who opted for drawdown - where you keep your money invested - ten years ago would almost certainly have been better off with an annuity. Political meddling with pensions has brought further pain. 

The amount of income you can receive from drawdown is limited to a rate set by the Government Actuary’s Department – also known as the GAD rate. The GAD rate varies depending upon age and sex. Up until April this year you were allowed to take up to 120% of the GAD rate which applied to your circumstances. Since April 2011 the Government has restricted this to 100% of the appropriate GAD rate. 

For those who were taking the maximum amount, this means a fall of at least 20% in income. But in reality it is much more than this, as a result of lower bond yields on which GAD rates are calculated.

The Bank of England’s recent announcement of further quantitative easing is going to depress bond yields even more, which has the knock on effect of reducing GAD and annuity rates further. This is on top of EU meddling to reduce annuity rates through the introduction of Solvency II and unisex rate rates at the end of 2012.

Respondents to this blog may also remember the Brown tax raid on pensions, when pension funds were no longer able to reclaim the 10% tax credit on dividends.

What can be done? Firstly, if you are in drawdown, make sure you have enough funds in cash to pay your income.  If you are drawing your income directly from equity funds, when markets are low you will be cashing in a disproportionately large amount of each investment to provide the same level of income.

Secondly you must take a much more active interest in your investments and make sure your fund manager and/or adviser really earn their fees. Reviews should be at least yearly and comprehensive.

For those looking at annuities make sure you shop around - there is an excellent tool on this website to get you started. If you smoke or take medication you may get a higher income but remember there are nine potential providers so make sure your adviser gets quotes from them all.

When will we get back to normal, whatever normal is? Are we actually seeing a paradigm shift? If so, maybe the next generation will have nothing to inherit as the current generation will have spent it! More and more pensioners are turning to equity release simply to make ends meet. 

I have written before about the younger generation, laden with student debt, who may rebel against the taxes needed to fund the ageing population, who in turn are using their capital to help their children get on the housing ladder.

Lots of questions and few answers - at least until Europe sorts out the current crisis and America gets a grip on its debt. The solution is in the hands of politicians from many countries. Why am I not holding my breath?