26 September 2012 last updated

Annuity income lower as equity markets continue to fall

Pensioner annuity income will be lower after equity markets react to the IMF warning that the financial markets remain as risky as before the credit crisis. Pensioners invested in equities before they retire and take their annuities will find their funds lower by up to 1.6% and this will reduce the amount of income they will receive from a pension annuity. After a period of increasing markets where the FTSE-100 index reached a high of 5,916 on 14 September, The International Monetary Fund (IMF) warned that global markets remained as risky now as it was prior to the financial crisis. The markets negatively with the FTSE-100 index lower by 92 points at 5,860 or 1.5% and the Dow Jones index lower by 145 points over two days closing at 13,413. European markets were also lower with the German Dax 2% lower, French Cac 2.8% lower and the Spain Ibex lower by 3.9% with worries also the Eurozone.

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Annuity income lower for pensioners in equities

Many pensioners approaching retirement leave their funds in equities until they take their benefits and risk a sudden fall in the market which will reduce the income they receive from their annuities.

As an example, a male aged 65 with a fund of £100,000 invested in UK equities reflecting the FTSE-100 index he could receive an annuity income of £5,661 pa and after the fall in the equity markets the reduced fund would purchase an annuity of £5,572 pa or £89 pa less. According to the Office of National Statistics (ONS) his life expectancy is expected to be 17.8 years so over his lifetime he will receive £1,584 less in income.

Risks still present in financial markets

The IMF report on financial stability has stated that the global banking system has not changed significantly since before the 2008 credit crisis with the structure and size of banks remaining the same and in some cases banks are even more concentrated with merger of weaker banks with stronger banks. Coupled with the problems that leading economies such as the US, UK and Eurozone have with long term growth if is likely that there will be future sudden falls in the equity markets.

These falls may also undermine confidence in the Eurozone and this usually results with funds being moved from sovereign debt in Europe to safe havens such as UK government bonds and gilts or US Treasury notes thereby increasing the price and decreasing yields. As annuity rates are based on the 15-year gilt yields a fall will mean lower annuities. Today the yields reduced significantly by 14 basis points from 2.26% to 2.12% and as a rough guide this would mean annuity rates should also fall by 1.4%.

Pensioners retiring should be aware of the impact of negative financial news has on both equity markets and gilt yields as both can result in lower annuity income at retirement.