A turbulent day on the stock market which saw almost £30 billion wiped off the value of the FTSE 100 is likely to deal another crushing blow to UK retirement incomes. Markets fell on the back of a lack of confidence triggered from the news that Spain’s borrowing costs had risen to 7.5%, a figure that many analysts describe an unsustainable. There is a now a growing feeling that Spain will need another Euro bailout that will dwarf the previous bailouts offered to Portugal and Greece. Looking across the Eurozone countries, the UK can borrow at a much lower rate than other major European countries which has inflated the cost of UK government bonds. This in turn has pushed down the yield which insurers use to price annuities, leaving them no other option but to cut annuity rates.
As well as hitting annuitants, the falling stock market also impacts upon the future income of those still saving for retirement as that is where most UK pension funds are invested. Nigel Green who is the CEO at the deVere Group says that..‘…the FTSE 100 plummeting by 117.9 points is disastrous for pension pots as the vast majority of all pensions and savings are linked, at least in part, to shares.” He added that those who were coming up to retirement age would be made permanently worse off due to recent events on the stock market. On the back of poor returns many are now looking to take their pension out of the UK and transferring it using QROPS, a trend that was likely to continue according to Mr Green.
Another trend that is likely to accelerate on the back of lower annuity rates is the number of retirees who choose an alternative to buying an annuity. Rates have halved over the past twenty years but more recently we have seen a sharper decline, with rates falling 14% since the summer of 2009. A 65 year old man with a £100,000 pension pot could have converted this into an annual income of £6,930 back in the Spring of 2009. Now that same pension fund would only be worth an estimated £5,850, over a £1,000 a year less. Would be annuitants are now understandably reticent to lock themselves into a life annuity whilst rates are so low. Many are now turning to the alternative options such as a fixed term product or opting for drawdown where their fund remains invested. However these only tend to suit those retirees lucky enough to have a larger the average pension pot so for most there is no escaping the problem of falling annuity rates. If you are in this situation the best advice is to shop around and declare any medical or health issues you may have as this could potentially boost your annuity offer.