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7 November 2012 last updated
Pension annuity income and markets lower with US fiscal cliff

Markets are concerned with the $600 billion fiscal cliff of higher taxes and spending cuts with steep falls reducing the value of pensioner funds and the level of income from annuities.

Equity markets are lower with the FTSE-100 index down 93 points at 5,792 and the Dow Jones index down 313 points at 12,932.

These are significant falls and pensioners retiring now will notice a lower annuity income due to the reduced pension fund value if these are surrendered in the next few days. Before retiring pensioners should convert their fund to cash to avoid any sudden fall in value to protect their future lifetime income.

As soon as President Barack Obama was re-elected attention switched to the impending fiscal cliff. Investors believe Congress will find it difficult to negotiate tax and spending cuts introduced by George Bush to tackle the $16 trillion US debt to be introduced in January 2013.

US fiscal cliff lowers annuity income
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Annuity income lower as fund values falls

Pensioners invested in equities may find their fund values are lower by between 1.6% to 2.4% and this will have an impact on their annuity in retirement. Annuity rates are based on a percentage of the fund and guaranteed for an annuitant's lifetime which cannot be changed once set-up.

For example, if a pensioner is aged 65, male with a fund of £100,000 they could purchase an annuity of £5,605 pa. If their fund reduces by 2% to only £98,000 before it is used to purchase an income, either with the existing provider or as an open market option the income will reduce to £5,492 pa or a fall of £113 pa. According to the Office of National Statistics (ONS) a 65 year old male will live another 17.6 years so in this example the income received over his lifetime will be £1,988 lower. For a female aged 55 with the same fund size the income would be £4,297 pa reducing to £4,211 pa or £86 pa, however, she will live for 25.7 years so the lost income during her lifetime will be more at £2,210.

Fiscal cliff future threats

There may be significant consequences if Congress does not find a rapid solution to the fiscal cliff with some economists predicting a recession in the US with the loss of 2 million jobs and face a downgrade in their credit rating. This would result in falls in equity markets around the would and mean that pensioners retiring in the UK next year may find their pension funds significantly lower in terms of fund value as well as lower income from their pension annuity.

It is expected at the very least Congress will delay the trigger of tax increases and spending cuts for a further period due to the severe consequences and try to manage the issues during this time which would be welcomed news for pensions retiring to purchase their annuities.

News related stories:
Pension annuity income and equities rise after fiscal cliff deal
Annuities income reduce as equities fall with fiscal cliff deadlock
UK annuity income from pension funds boosted by fiscal cliff offer
Retirement annuity income kept high with Federal Reserve stimulus
Related internet links:
Guardian - Congress to resolve fiscal cliff
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