17 May 2012 last updated

Best annuity income threat to pensioners as equities fall

Equity markets have continued to reduced with Eurozone uncertainty reducing pension funds and the best annuity income for pensioners. The developing crisis with Spanish banks where customers are withdrawing their funds for fear of loosing their life savings is undermining markets with further falls around the world. The FTSE-100 index reduced by 66 points to 5,338 with the Dow Jones index lower by 156 points at 12,442 and Europe lower by about 1.0%. The FTSE index has reduced 474 points or 8.1% since the beginning of the month when it climbed to 5,812. This fall is significant for pensioners retiring now with funds remaining invested in equities as any decrease will reduce the amount of income they will receive from a pension annuity. The uncertainty makes it difficult for those still in employment and trying is determine the best time to finally take their annuities.

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Lower annuity income from pensions expected

A 65 male pensioner with a fund of £100,000 could purchase a single life, level annuity with an income of £6,112 pa at the beginning of May, two and a half weeks ago. If this was invested in equities the fund may have reduced to £91,900 so the annuity income that could be purchased will also be lower. In this example the income would be £5,614 pa or a fall of £498 pa.

It is also likely that the best annuity rates will reduce as gilt yields have decreased from 2.67% at the beginning of the month to 2.41% or 26 basis points. The 15-year gilt yields reduced today by 2 basis points to 2.41%. As a guide this would translate to a decrease in annuities of 2.6% so the combined effect of falling fund value and decreasing annuity rates will make a significant difference to the income a pensioner will receive from one month to another.

Eurozone uncertainty biggest threat

This threat to pensioners is due to the Eurozone crisis as action taken by investors to protect their funds by moving these to safe havens in times of risk and uncertainty means lower equity markets. The funds may also be used to purchase UK government bonds and gilts which in turn increases the price and reduces the yield resulting in decreasing annuities. The current concern is the financial security of Spanish banks and the fact that nervous customers are withdrawing their funds with more than 1 billion euros withdrawn in the last few days.

Moody's have also cut the credit ratings of 16 Spanish banks that are struggling to deal with bad debts, mainly due to the over inflated property market. Moody's also downgraded Greece from CCC to B- due to the euro exit fears. The governor of the Bank of England, Sir Mervyn King, has warned that the crisis if Greece left the euro would cost $1 trillion.

The severe uncertainty in the Eurozone will mean pensioners can expect the best annuity rates to be lower for several months and volatile equity markets could means fund reducing in value suddenly.