9 October 2012 last updated

Annuity income at retirement reduces with weakening global economies

The IMF has said global economies are struggling to recover with a knock on effect of lower equity markets and pension funds for those retiring now with reduced income from an annuity. The International Monetary Fund has said it is alarmed by the high risk of recession and deterioration for the economic outlook for countries around the world and in particular Europe and the US if threats are not managed correctly by leaders. This is a particular threat to pensioners retiring in the next year or so as many remain invested in equities until they purchase their annuities and are exposed to the volatility of markets with very little time to wait until there is a recovery. A downturn in world economies would see falls in equities and pension income at retirement could reduce significantly for pensioners that do not protect their fund by converting to cash.

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Eurozone crisis still central to global recovery

The IMF have said that Eurozone leaders must act swiftly to solve the debt crisis for Greece and Spain with evidence of weakness in peripheral countries spreading to the rest of Europe. In particular Spain is likely to see a contraction of 1.5% this year and 1.3% next year with Italy contracting by 2.3% this year and 0.7% next year with Germany under greater pressure to find growth.

A critical measure for Europe will be to allow the European Stability Mechanism (ESM) which will have a fund of 500 billion euros by 2014 to directly bailout banks in Spain in order to avoid contagion spreading around Europe. The forecast is global growth will reduce in 2013 from 3.9% expected to 3.6% and UK growth has also been revised down in 2012 from 0.2% to -0.4%, the largest decrease.

Equity markets at a high point

Markets are currently high with the FTSE 10 index at 5,810 up 17.5% on a year ago when the index was at 4,944. As an example, in October 2011 a male pensioner aged 65 with £100,000 could purchase an income of £6,093 pa. However, now in October 2012 equities have increased and if the fund has reflected the full gain of the FTSE-100 index, this will be £117,500.

However, annuity rates have decreased by 7.2% over this period of time so the fund can purchase an annuity income of £6,638 pa representing an 8.9% increase at retirement. Before taking their benefits pensioners should lock-in these equity gains as markets can decrease quickly wiping out the improvements in pension income even though pension annuities have decreased significantly in the last year.

If pensioners are willing to accept a higher risk to improve the annuity rate they could use a with profits annuity or an investment backed annuity and receive up to 30% higher initial incomes than the standard. An enhanced annuity would also increase the annuity for lifestyle medical conditions such as high blood pressure, Cholesterol, are a smoker or being overweight. For more severe health conditions such as diabetes, heart conditions or cancer an impaired annuity can be considered offering incomes of 40% higher than those in good health using the highest open market option.