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10 October 2012 last updated
Annuity income falls as S&P downgrades Spain's credit rating

Equity markets have seen decreases as Standard & Poor's reduce Spain's credit rating and for pensioners invested in equities this means a lower income from their annuity.

Standard & Poor's have downgraded Spain's credit rating by two notches from BBB+ to BBB- which is one stage above junk status and reflects the deteriorating situation in the country. In particular the rising unemployment and continued austerity measures are likely to continue the recession and the new rating reflects the negative future outlook.

The reaction is lower equity markets with the FTSE lower by 93 points or 1.5% this week and the Dow Jones index lower by 266 points or 1.9%. For any pensioner retiring now with their pension fund remaining invested in equities their fund will have reduced. A smaller fund means a lower pension annuity for their lifetime as once an annuity is purchased it cannot be changed.

Spain rating decreases annuity income
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Income from an annuity 1.5% lower for pensioners

With the lower equity markets pension funds with a similar volatility to the FTSE-100 index will have reduced by about 1.5% and this immediately means a lower lifetime income for pensioners. For example, a male aged 65 with a fund of £100,000 could receive income of £5,664 pa at current annuity rates.

With the recent decrease in equities the fund has reduced to £98,500 and the annuity income would be £5,579 pa or an £84 pa reduction. The Office of National Statistics (ONS) would expect him to live 17.9 years so over his lifetime he would receive £1,478 less income.

Avoiding a lower annuity income

When approaching retirement pensioners should consider the level of equity markets. In October 2011 the FTSE-100 index was at 4,944 and has increased 927 points or 18.7% to 5,871 on 5 October 2012 which is a significant gain. Before taking their annuity pensioners should switch their fund to cash to prevent any sudden decrease in the value of their fund just before they purchase their annuities.

The open market option can take up to four weeks to transfer funds from the existing provider to a new provider and markets could decrease by up to 10% as a result of global events. Many pensioners would then be faced with the option of accepting a lower annuity income for their lifetime or delaying taking their pension in the not receiving an income until later and in the mean time lose the opportunity to receive an annuity while they wait.

Pensioners could benefit from a with profits annuity or investment backed annuities that will offer a 30% higher starting income than the standard open market option annuity, if they are prepared to take more risk as they have other pension income.

An impaired annuity could be considered if they suffer from poor health such as high blood pressure, Cholesterol, are a smoker, have diabetes, heart conditions or cancer. If they have been hospitalised, take prescribed medications and even if they are obese they may receive an enhanced annuity up to 40% greater than the income offered by the standard open market option annuity.

News related stories:
Pension annuities gain as bailout for Spain sees markets up
UK annuity rates can increase with ECB bond buying plan
UK annuities would be lower if Eurozone AAA rating downgraded
Related internet links:
Bloomberg - S&P downgrades Spain
Telegraph - S&P downgrades Spain's credit rating
Annuity Rates
  Age Single Joint  
  55 £4,574 £4,142  
  60 £4,961 £4,610  
  65 £5,691 £5,238  
  70 £6,478 £6,098  
£100,000 purchase, level rates, standard
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