Kevin Hollister

Kevin Hollister, founder of pensions planning firm Guiide, discusses what is perhaps the most important question for pension savers close to retirement - the effect of the collapse in gilt prices on pensions.

Many people will have heard on the news about the collapse in government bond (gilt) prices and the effect on pensions. The main coverage focused on a very technical issue around schemes hedging the cost of their liabilities rising.

The issue was really about the fast pace of the collapse. This caused a temporary, but very large problem. Since the Bank of England took urgent action to halt this, I would envisage that the issue has largely been stabilised. In short, if you have a defined benefit pension scheme, the benefits are likely still very safe.

The potentially larger issue (which seems to be getting less attention) is for savers in defined contribution schemes (pension pots) who are close to retirement.

Traditionally, the default investment strategy for these arrangements was to move savers from shares to long term gilts as they approached retirement. Typically 90% of savers just choose the default investment fund.

That approach was historically valid, as nearly all people used to buy a guaranteed income for life (an annuity). The cost of buying one was directly linked to the price of gilts. So if the pot went down, the cost to buy the annuity was less and therefore a change in gilt prices made little difference.

These days this isn’t the case. We know many people take all their pot, as cash, all in one go. For these people, if they have been moved to gilts it could mean a large reduction in their pots, 30% or so, just before they plan to take them.

The first thing to check is - was my pension pot moved to gilts? This may not be the case as some schemes may have understood that you planned to take cash and moved you to cash instead. The value of this cash would be stable.

The only silver lining here is that the price of buying these guaranteed lifetime incomes will have reduced a lot. This means many people may be able to find a good deal to buy some lifetime guaranteed income.

For those planning to buy an annuity anyway, this will offset the effect of the fall. For those who were invested in cash, who may now be looking to buy one, this may actually be very beneficial.

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