11 April 2012 last updated

Pension annuities income could be hit by eurozone debt crisis

The debt crisis will diminish credit worthy bonds and gilts with investors chasing small numbers of safe investments increasing the price and reducing yields and annuities. The International Monetary Fund (IMF) has said that as the number of safe assets reduces it could remove $9 trillion from previously safe assets by 2016. As credit agencies remove AAA rated status investors re-direct funds to safe assets like government bonds and gilts including the US and UK. The debt crisis in the Eurozone and in particular Spain and Italy could help undermine financial stability with a lack of safe assets for investors resulting in greater demand for UK gilts and lower yields and annuity rates. Annuity rates are based on the 15-year gilt yields and with demand for these vehicles remaining high pensioners and pension funds can expect lower annuities in the future.

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Volatility to continue for annuities

After yesterdays significant falls, equity and bond markets have recovered slightly with the FTSE-100 index up 39 points at 5,635. The Dow Jones index increased 89 points ending at 12,805 and Europe increased by about 0.75%.

Gilt yields were also up slightly with the 15-year gilt yields increasing by 3 basis points at 2.58%. This month is likely to continue to be volatile as markets and investors absorb the implications of a positive first quarter for 2012 against mixed global economic news from the US and growth slowing in China with evidence showing the risk of the debt crisis spreading to Spain and Italy. This means annuities income for pensioners will continue to remain volatile with uncertainty over the security of investments, in particular in the the Eurozone.

Pensioners retiring should be aware of this volatility as it will increase the risk of their funds decreasing if they remain invested in equities and a possible drop in annuity rates while they transfer their pension using an open market option.

To maximise the income from annuities pensioner suffering from lifestyle medical conditions such as high blood pressure, Cholesterol, are a smoker or are overweight could receive a higher income from an enhanced annuity. For serious conditions such as such as diabetes, heart conditions or cancer an impaired annuity can could offer incomes of 40% higher than the highest standard annuity.

If they do not have any medical conditions pensioners can receive up to 30% higher initial incomes using a with profits annuity or investment backed annuity. Pensioners would to take a slightly higher risk than the guaranteed open market option so should have other pension arrangements such as a final salary scheme or other personal pension plans.