The Bank of England has increased interest rates by 0.25% to 1%, a level it has not been at since 2009, 13 years ago. With latest forecasts showing that the UK will suffer a 1% contraction by the end of Q4, 2022, and the BoE expecting inflation to continue to increase, reaching a high of 10% in October, the highest level since 1982, how might financial planning firms be reassessing their clients’ retirement income plans?
Last month BoE Governor Andrew Bailey noted the Monetary Policy Committee (MPC) were walking a “very tight line” between tackling inflation and avoiding recession.
Dan Boardman-Weston, CEO and CIO at BRI Wealth Management, said the Bank “will need to tread carefully and not raise rates too quickly or too aggressively otherwise they risk tipping the economy into a deeper recession. He warned: “The inflation continues to be largely supply driven and interest rate increases are not going to assist with these contributory factors to inflation. 2022 will likely be a pivotal year for monetary policy. The risks of a misstep and a recession have increased significantly.”
Jonny Black, strategic director at abrdn Adviser, said the rate rise and inflation outlook could “prompt fresh conversations with clients” around how the rate rises and inflation will affect their finances, “particularly in areas such as inflation-proofing their retirement income”.
“This may be greater client interest in annuities, with their rates increasing in recent months as the Bank rate has crept up. More broadly, however, it will be another chance for advisers and clients to review investment and drawdown strategies to ensure that individuals – approaching retirement, and who have already retired – still have the best chance of making their money work for them, and to adjust if necessary.
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown concurred that annuities “could be about to step back into the spotlight” with interest rate rises looking set to further boost annuity incomes in the coming months.
“After languishing in the doldrums for some time annuity incomes have risen markedly in part helped by recent interest rate increases and we should see this upward momentum continue,” she said.
But she added, there are other factors to consider. “Annuity incomes are much higher than they were this time last year, but they remain well below what you could get prior to the financial crisis of 2008.
“Inflation is also a key factor as level annuities do not rise in line with inflation and so income secured today will buy less and less as the years progress.”
“Inflation linked annuities can be bought but the starting income is markedly lower, and it can take many years for it to catch up to what [a client] would get from a level policy. The decision to annuitise cannot be unwound if circumstances change and so [clients] will need to live with [their] decision long-term.”
One way around this, she added, was to annuitise a pension “in slices over a period of time”, securing a level of income that meets day-to-day expenses while leaving the rest in drawdown. “This approach gives the peace of mind of a guaranteed income with the potential for further investment growth and the flexibility to secure more as and when needed.”
Black added that all eyes – including those at the Bank – now would be on the upcoming April inflation figures, “to see just how much more the cost of living could rise”.
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