14 May 2012 last updated

Retirement annuity income threat from Greece euro exit

Problems in the Eurozone have resulted with retirement income reducing by over 8% during this month with lower equity values and reduced annuity rates as gilt yields fall. The higher risk of Greece leaving the euro has resulted in a fall in equities and gilt yields which will mean pensioners retiring now will have a lower income from retirement annuities. Those pensioners that remain invested in equities will find their funds are reducing which means a lower income can be purchased with an annuity. The FTSE-100 index reduced today by 110 points or 2.0% to 5,466 adding to the 240 point reduction so far this month or a total of 6.0% in May. In the US the Dow Jones index was down 125 points at 12,695 and Europe was down from 1.0% to 2.66%. The combined effect of lower annuity rates and equities has placed pressure on people retiring in the UK and possibly having to postpone taking benefits now in the hope income recovers.

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Pension income lower by over 8% this month

Retirement annuity rates are based on gilt yields and the 15-year gilt yields reduced by 9 basis points to 2.44% today. As a rough guide a 9 basis point fall in the gilt yields results in a 0.9% fall in annuity rates although gilt yields started the month at 2.67%. For the month so far the reduction has been 23 basis points which means retirement annuities could reduce by 2.3%.

As an example a male aged 65 retiring in April with a £100,000 fund could purchase a level, single annuity of £6,112 pa and in May with the combination of falling equities and retirement annuity rates the income will reduce to £5,614 pa. This is a fall in pension income of £498 pa or 8.1% due to the events taking place in the Eurozone.

With financial markets anticipating Greece leaving the euro investors continue to move funds to safe havens such as UK government bonds and gilts and if this state of concern continues gilt yields are likely to continue to fall with the likelihood of pension annuity rates reducing later in the month.

Pensioners can increase annuity income

Even though annuity rates are falling, pensioners can increase the income from their fund by taking into account any medical conditions they may have. Lifestyle medical conditions such as high blood pressure, Cholesterol, smoking or being overweight offer a higher income from an enhanced annuity.

If they suffer from more serious health conditions such as diabetes, heart conditions or cancer an impaired annuity could offer incomes 40% higher than the highest standard annuity.

Pensioners can also receive up to 30% higher initial incomes than the standard open market option by if using a with profits annuity or investment backed annuity. If pensioners have more than one personal pension fund or a final salary pension and are not dependant on a particular fund they may be able to accept the slightly higher risk and receive a higher initial income.