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23 October 2012 last updated
Pension annuity income lower as market falls after poor US earnings

Annuity income from pensions reduces for those remaining invested before buying annuities as world markets fall with the US earnings from the third quarter disappointing resulting in significant falls on Wall Street and the FTSE.

Wall Street experienced falls with the Dow Jones index lower by 243 points or 1.8% at 13,103 and the FTSE-100 index lower by 85 points or 1.5% at 5,798.

Over the past week the FTSE-100 is down 2.0% and the Dow Jones down 3.2% and for those pensioners retiring with their pension still invested in equities means a lower income from their annuities.

Before retiring pensioners should convert their equity funds to cash to avoid any sudden fall in the value of their pension as markets can be volatile realising a lower annuity income. Usually it is not possible to delay retirement in the hope of a recovery as the income is need immediately.

 
Pension income lower as equities fall
 
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Pensioners loose income for their lifetime

When pension annuities are purchased the pension fund is exchanged for an income and the annuity starting level is fixed for their lifetime. If equities fall this has an immediate impact on the annuity that can be purchased.

For example, if a male aged 65 with a fund of £100,000 purchased an annuity before equity markets decreased the income would be £5,664 pa. With a portfolio in UK and US equities reflecting the Dow Jones and FTSE-100 index the fund would reduce to £97,400 and the pension income would reduce to £5,516 pa or a fall of £148 pa assuming annuity rates remain the same. At age 65 the Office of National Statistics (ONS) would expect him to live for 17.6 years so over his lifetime the lost income would be £2,604.

The poor US earnings results adds to other worries about the global economy slowing including China and concern over Spain being able to meet the deficit cutting targets as their economy contracts. The Eurozone debt crisis is impacting the largest companies in America and it is likely that equity markets will react in a similar way to future information showing continued global slowdown.

Pensioners should make sure their funds are not significantly exposed to equity risk just before taking their benefits to avoid being left with lower annuities at retirement.

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Related internet links:
Reuters - Weak outlook Dow Jones worst day
Guardian - FTSE drops after poor US corporate news
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