Question

What are some factors that could cause pension funds to be vulnerable to interest rate declines. Explain

Answer 1

There are multiple influences that can positively or negatively affect fund or pension income

1.Gowyh rate:The growth rate is perhaps the single biggest factor to determine the eventual size of a fund. It’s therefore vitally important to have an active interest in your fund, to check its performance and see if it may be better off elsewhere. Unless you’re a financial professional, it’s not advisable to try and manage the fund yourself, so it’s worth having a pension review to check the performance and consider the best options for maximising the fund.

2.Age:The main impact of age on your pension is it determines how long the fund needs to provide an income for. If you decide to stop working at 50, you may need to live off that money for another five decades, whereas if you keep working into your 80s you won’t need to make the money last as long and can afford to remove larger chunks. Age also has an effect on the State Pension: the current rules are anyone who reaches the State Pension age before 6 April 2016 will see it increase by 10% each year it is deferred. For this financial year the basic State Pension is £5,881.20, and you will receive a further £611 if you defer for one year.

3.Health:If you are considering purchasing an annuity when you retire, it’s worth knowing that you can secure extra income if you qualify for an enhanced annuity. There are a range of possible qualifying factors, including illnesses like cancer and diabetes, and lifestyle choices like smoking, as our infographic shows. An enhanced annuity can provide much more income than a standard annuity – there’s a difference of 64.7% between the bottom standard annuity and the top enhanced annuity income for a £50,000 fund crystallised at the age of 65.

4.Fees:If you have a pension then you are probably paying an annual fee. There’s no avoiding this, but it does vary between funds. The key thing to remember is that the fund must grow by more than the fee for you to actually see a return – low-performing funds can lose money if the fee is continually higher than the growth rate. You shouldn’t be scared of higher fees though, as it could be that the best performers charge the most. A pension review will keep you informed of how well your fund is doing, including whether you could see better results by having lower fees.

'This has been feeding through into improved annuity rates; good news for anyone looking to buy a guaranteed income as they’re now being offered better terms.

‘Shopping around for the best annuity remains imperative, particularly because two thirds of retirees now qualify for higher levels of income because of their health or lifestyle.’

Long added: 'Rising gilt yields also impact on final salary pension schemes. There is a direct link between gilt and bond yields and the liabilities on final salary schemes.

'A rise in interest rates would likely feed through to lower scheme deficits, however it could also mean the end of the historically high scheme transfer values we have seen in recent months.’