Monday 20 November 2017

Cost of buying pension shoots up 40pc in three years due to German link

Photo: Thinkstock
Photo: Thinkstock

Charlie Weston Personal Finance Editor

THE cost of buying a pension has shot up by 40pc in the last three years.

A male worker now needs €200,000 to get an annual pension of €10,000.

Ten years ago you could get a €10,000 pension for €140,000.

So-called annuity rates have jumped because they are priced off German bonds. But the interest rate on these is at an all-time low as investors pile into German bonds because of the perceived soundness of the German economy.

Head of the Irish Association of Pension Funds, Jerry Moriarty, said the rise in annuity rates meant it was becoming more expensive to fund a pension.

The rising costs of annuities was putting pressure on defined benefit pension schemes, with eight out of 10 in deficit.

The eurozone crisis has sent annuity rates through the roof. Bonds in safe-haven countries such as Germany and France have become expensive while the yield on these has gone down, according to Michael Walsh of consultancy Mercer.

Defined benefit pension schemes are regarded as insolvent because they are tested as if they were to close tomorrow and had to buy annuities for pensioner members of the scheme. The high cost of annuities means most defined benefit schemes do not have enough funds to buy annuities for all their members.

This test, of funding standard, is in effect being dictated by German bond yields, Mr Walsh said.

Mr Moriarty said the rise in the cost of annuities and the fall in their yields was destroying pension funds.

"Since the start of last year alone there has been a 20pc increase in the cost of annuities. Half of that rise has been in the last month alone. That flows straight through to the value of pensioner liabilities in funds."

Closing

He said the upshot of this, along with tougher rules announced by the Pensions Board last week for defined benefit schemes, would mean large numbers of schemes would end up closing.

Meanwhile, an author and financial coach said the tax concessions that pension savers get should mean that people can get superior returns by putting money into their own fund.

Paul Overy, of Dublin-based PAO Communications, said the tax reliefs even make up for poor returns from pension products.

Also, yesterday Standard Life launched a new product that allows ordinary investors to have access to high-end funds.

It said its investment management option called Myfolio would appeal to the mass market from €175 per month.

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