UK pension income levels are being corroded by a crisis in the Eurozone as well as by changes in legislation which ban gender-pricing for insurance. On top of this are EU directives stating that insurers must hold more cash on their balance sheets. All these factors have culminated in lower annuity rates for consumers, which means a smaller retirement income at a time when inflation and prices are high. As Eurozone countries become less attractive to invest in, the UK becomes more attractive and is being seen as a safe bet, which is pushing up the price of our bonds. The yields from these bonds fall as a consequence which in turn has the net result of lower rates for annuities.
Those retirees who are wealthy enough may want to avoid these plummeting rates and invest their pension fund in the stock market via income drawdown. However the market has performed poorly of late, for example last summer it fell below 4,800 points, a 13 month low. Managed pension funds have also dropped in value by 3.3% since the summer, showing how the market is impacting on real people’s incomes. In addition to the woes on the stock market, EU legislation is also dragging down rates as insurers are being forced to hold more capital to comply with rules designed to prevent them from going insolvent. Steve Lowe from Just Retirement says that…”…an awful lot of our energies are being drained by legislation coming from Europe. Some of it is intended to make life better for the consumer, but we question whether it’s too much.”
Finally there has been change in EU law which now prevents insurers using gender based pricing when offering insurance products, including annuities. Traditionally men were offered better rates than women as they statistically on average lived for a shorter number of years. Now this practice has been banned, so male rates have been brought closer to female rates. Although this would on the face of it seem fair, 80% of annuities are bought for men for themselves and their partner/spouse, which means overall most people are likely to be worse off, with the exception of single women who are likely to have slightly higher rates. One estimate put the fall in male rates as high as 13 percent, while female rates are only likely to see a slight increase. Laith Khalaf, an annuity expert from Hargreaves Lansdown derided the changes as… ”….petty policy-making that will cause huge upheaval. There will be some winners, but on average pensioners will lose out.’