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16 December 2014 last updated

Annuity income now 10% lower after falls in FTSE index and gilt yields

Annuity income from a pension that remains invested in a fund tracking the FTSE-100 index has reduced by over 10% in only two weeks after significant falls in equity markets and gilt yields sending annuity rates to a new low for the year.

The FTSE-100 suffered the worst weekly fall since 2011 and has since continued to slide to as low as 6,183. The index is lower by 559 points or 8.29% over the past two weeks.

Most people remain invested before they retire and take their benefits and for anyone with a pension tracking the FTSE index would experience another blow as annuity rates have also reduced.

For a person aged 65 with a fund of £100,000 rates are 2.71% lower in December and combined with the fall in fund value due to the equity markets means income from an annuity has reduced.

An annuity paying an income of £5,900 pa on a single life, level basis in November has reduced by £636 pa to £5,264 pa just two weeks later.

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Combined fall in equities and yields to blame

Annuity rates are mainly based on the 15-year gilt yields and since the beginning of the month yields have reduced 12 basis from 2.35% to 2.23%. As a general rule this would mean rates reducing by 1.2%, however, they were already expected to fall a further 2.4% due to November's figures. The current 2.7% fall in December still leaves more room for further falls.

  Benchmark annuity rates and FTSE-100 index
  Jun Jul Aug Sep Oct Nov Dec
Rate £6,078 £6,143 £6,135 £5,987 £5,948 £5,900 £5,740
FTSE 6,878 6,730 6,823 6,647 6,546 6,722 6,183

The above table shows that both equity markets and yields are falling at the same time and this has produced the potential fall in income from annuities of 10.77%.

For our benchmark example for a person aged 65 with a fund of £100,000 could have purchased a single life, level annuity with an income of £5,900 pa reducing by £636 pa to £5,264 pa.

In terms of lifetime income, the Office of National Statistics (ONS) would expect a male to live for 17.3 years and he will have £11,002 less over his lifetime. For a female she can expected to live for 20.4 years decreasing her income by £12,974.

Economic uncertainty driving the falls

A series of economic events starting with the Eurozone and threat of deflation followed by Greek prime minister's decision to hold a snap election sent markets lower. Further poor economic data from China sent global markets lower wiping more than $1 trillion from the value of equities.

As oil prices began to plunge investors sent markets even lower at the start of this week followed by Russia increasing interest rates to a staggering 17%. The FTSE-100 index has a bias to commodity companies and falling crude prices has sent both oil and gas stocks lower.

As a response to uncertainty investors may seek the security of sovereign debt such as US Treasury notes and UK government bonds and gilts. This forces the price higher and the yields lower.

To allow for a recovery in markets for pension funds forced lower due to falling markets it is possible to remain invested and take an income if people can accept risk. By considering flexible drawdown an income or cash sums can be taken at any time and is accessible even with smaller funds from £30,000 or more. Drawdown offers the greatest flexibility and allows you the opportunity to return to buy an annuity when markets and annuity rates recover.

News related stories:
Retirement annuity income remains 7% lower after slide in markets
Pension annuity income threat as FTSE and yields fall on new data
UK annuity income lower as FTSE-100 index falls on tech bubble fears
Related internet links:
Guardian - Stock markets tumble as FTSE suffers worst week
Telegraph - UK stocks suffer worst week since 2011
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