New rules from the EU and the ongoing European debt crisis threatens pensions and pension annuities here in the UK. The problems come from fresh directives which require insurance companies to hold greater reserves and the fact that they can’t carry on using gender to calculate annuity rates. As Europe’s debt problems have grown, the value of UK pensions and pension annuities has crashed. Statistics given to Money Mail show that the annuity income available from every £1,000 worth of a pension fund has fallen by around 10% since July, 2011.
A 65-year-old male retiring with a £100,000 pension fund today is £650 worse off each year for life compared with just months ago. Unfortunately, the eurozone crisis we are witnessing has speeded up the fall in annuity rates.
So, what’s happening? Investors have been turning to UK government bonds as a safe investment – a safe haven - but as the popularity of the government bonds has increased, so has their price. This has crippled returns, or yields, which are directly linked to annuities, and so annuity payouts have tumbled, too.
As eurozone debt fears increased in August last year, the FTSE 100 dropped below 4,800, with around £125 billion wiped off the value of London shares in five days. Since then there has been a bit of a recovery, but the average managed pension funds has lost almost 3.3% since July, according to Hargreaves Lansdown. This means that a £100,000 pension fund has dropped £3,300 before pension annuities even enter the picture. Meanwhile, falling gilt yields have seen HMRC cut the maximum that can be taken from a £100,000 income drawdown fund from £8,400 a year in March last year to £5,500 today.
If the EU debt problem isn’t enough, an EU directive forcing insurers to hold more cash in the bank is going to force pensions annuities further down. These new EU rules are designed to stop insurance companies, who sell pension annuities, from going bust in a crisis. But because they need to build up their cash reserves, they are going to have to cut back what they pay out on income. As a result, they have cut annuity rates.
The final nail in the coffin for annuities, so to speak, is a separate EU directive, which takes effect later this year. It bans insurance companies from offering annuity rates priced by gender. On average, women actually live longer than men, so are usually offered slightly less annuity income per year. Similarly, an overweight, 65-year-old smoker residing in Edinburgh is likely to have a shorter life expectancy than a marathon runner residing in Cornwall, and therefore gets a larger annual annuity income to compensate.
The arrival of ‘unisex’ annuity rates could spell disaster. Annuity rates will not meet in the middle, most experts suggest. One estimate by the ABI warned that male annuity rates might fall by as much as 13% in what they call a worst case scenario, while female incomes will get only a tiny boost.
As I said at the outset, pensions and pension annuities in the UK really are under threat.
