Public encouraged to take more risk to compensate for smaller pension pots

Oliver Gill
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Low interest rates and an aging population is keeping annuity rates low (Source: Getty)

“Work longer, save more and look to take more risk” was the gloomy advice from the pensions sector following the reports over the weekend that those entering retirement now can only expect to receive half the income of their counterparts at the turn of the century.

The Organisation for Economic Co-operation and Development (OECD) will lay out their findings in a report to be released this week. It will warn that the prolonged low interest rate environment has had severe impact on the funds available for those with defined contribution schemes.

John Blowers, head of online financial broker, Trustnet Direct explained that with such low annuity rates, people ought not be too risk averse.

“There is this immediate assumption that all risk is bad, and yes in retirement you certainly don’t want to be taking chances, but it’s vital to remember that we are looking at the long term here,” he said.

The OECD has previously called on governments to increase public expenditure and investment in order to stimulate economic growth. This would in turn lead to a relaxing of the ultra-low interest rates undermine the growth in pension pots.

There is a further complication according to Blowers: “Aside from this lengthy spell of record low interest rates, one of the main reasons we are seeing annuity rates fall is the simple fact we are living longer.”

But with increases in interest rates in the UK and Europe continually pushed back by central banks, Blowers said that the public needs to take control of their own financial planning for later life and ought not to look to the government for help.

“The government needs to ensure people are sufficiently incentivised to save for retirement but expecting rampant tax breaks for doing so would raise the age old question of where does the money come from. The fact we saw no big change to pension policy in the last budget underlines the fact that politicians recognise the value of the current tax breaks,” he said.