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4 February 2013 last updated
Best annuities threat as eurozone debt crisis grips markets

The eurozone debt crisis was back in the minds of investors sending borrowing costs for Spain and Italy higher, world markets lower and threatening the best annuities for people retiring in the UK today.

Although equity markets have been rising over the past few months investors can be easily shocked with the news from Europe of political uncertainty could undermine stability.

The FTSE-100 index was 1.5 % or 100 points lower at 6,246 with the Dow Jones 130 lower at 13,880 and across Europe Spain's Obex falls 3.77%, Italy's MIB lower by 4.5%, Germany's DAX 4.4% down and the French Cac 3% lower.

Most individuals that retire remain invested right up to the point they buy their pension annuity and this represents a risk should equity markets suddenly fall. People should protect any gains by transferring to a cash fund as many will not be able to wait for a recovery and are forced to accept a lower income from annuities.

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Spanish and Italian debt soar with political uncertainty

At a time when equity markets are ignoring poor economic data in the eurozone and rising to four year highs, the sudden political uncertainty has shown that investors remain worried that the debt crisis could quickly return.

The problems concern allegations of corruption surrounding the Spanish prime minister Mariano Rajoy involving a secret cash fund with calls for him to resign coupled with the increasing support of Italy's former prime minister Silvio Berlusconi.

For 10-year bonds Spain's cost of borrowing of 5.4% increased 23 basis points and Italy's at 4.5% increased 15 at one point as investors moved funds away from sovereign debt forcing the price down and yields up. In the UK the 15-year gilt yields have remained unchanged at 2.60% suggesting investors are not moving their funds to safe havens suck as UK government gilts.

Annuities income lower as equities fall

The direct effect to income is that equities have reduced by 1.5% in the UK impacting on the best annuities. For example, a female aged 65 with a fund of £100,000 could purchase an annuity on a single life, level basis for £4,922 pa but with equities reducing the fund would be lower at £98,500 and produce an income of £4,848 pa.

Annuity rates have increased this month and the fall in the markets offsets this completely. Over the persons lifetime the Office of National Statistics (ONS) would expect a female aged 60 to live for 24.6 years and the lower annuity income of £74 pa would mean £1,820 less over her lifetime.

It is possible to counter these falls by transferring to a cash fund before buying annuities protecting any gain. Another option to increase income is to consider a with profits annuity or investment backed annuity which would offer an initial income 30% higher than the open market option standard rate. These are slightly riskier as the income can go down as well as up, however, the volatility is reduced as income is smoothed over time. They would be ideal if an individual also had other private pensions or a final salary scheme.

News related stories:
Pension annuities gain as bailout for Spain sees markets up
UK annuity rates fall up to 1.9% as Spain's bond yields soar
Best annuity rates decrease possible with Spain's debt crisis
Buying annuity boosted as gilt yields rise after EU-US trade deal
Annuity income lower as markets and gilts fall on Italy deadlock
Related internet links:
Guardian - Eurozone worries over Spain and Italy
Telegraph - Markets fall over concern for Spain and Italy
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