Market turbulance taking a serious toll on annuities

These are seriously troubling times for people about to retire, as their retirement income faces a double blow.

Data from PricewaterhouseCoopers shows that the combination of turbulent stockmarkets and falling annuity rates mean overall pension incomes for people retiring today could be as much as 30% lower than three years ago.

First, stockmarkets plummeted at the end of July and have failed to recover in any meaningful way, with the FTSE 100 still down by as much as 17% in early October, so pension portfolios - particularly those heavy on shares - have lost a lot of value.

But diving equity markets have also driven up the price of government bonds (known as gilts), as nervous investors look for a safer haven for their investments.

As gilt values rise, their yield - the amount they pay out as a proportion of their value - falls. And that also hits retiring people hard, because annuities (the income for life bought with a pension fund) are priced on gilts (and corporate bonds). Thus, if the yields on gilts fall, so does the income paid by annuities.

Downward trend

The annuity trend over the past three years has been a largely downward one.

For example, according to PwC figures, a £300,000 pension pot now converts into a pension income of just £18,500 a year. Three years ago, when annuity rates were more attractive, it was worth almost £22,500.

But the recent market turbulence caused by the sovereign debt crisis has wreaked particular damage. Over the past three months alone, the income from that £300,000 pension fund has fallen by £1,000 as a consequence of falling gilt yields.

This year's pension winners and losers

Biggest annuity fall for 20 years

Billy Burrows of the Better Retirement Group reports that August saw the largest fall in annuity rates in a single month since he began keeping records over 20 years ago; he estimates that since July, rates have fallen by an average 9%.

"At present, gilt yields are at their lowest levels since World War II and annuity rates are at an all-time low," Burrows comments.

What's the outlook? In the short term, annuity rates could get even worse before they improve as the government has announced a further £75 billion of quantitative easing, which will push gilt prices up further.

So, unless you have a crystal ball, or alternative sources of income in the meantime, there's little point deferring your annuity, says Burrows.