Pension incomes plummet due to falling stockmarkets

10 October 2011

People approaching retirement are facing a double hit to their pension income due to the turmoil in global stockmarkets.

A report from PricewaterhouseCoopers (PwC) has revealed that people with private pensions will be as much as 30% worse off than people with similar savings who retired in 2008.

The problem is that falling stockmarkets have eroded the value of equities in people's pension pots. At the same time, cautious investors are buying government bonds, known as gilts, which is driving up the price of gilts and pushing down the rate of interest - known as the yield - paid to gilt holders.

Falling gilt yields is a big problem for pensioners as most pension providers invest in gilts and use the yields to pay pensions. As a result, the income from annuities - the income for life policies most people buy with their pension pots - is based on gilt yields.

Falling gilt yields have cut pension incomes significantly. In 2008, every £100,000 you had in your pension pot would buy the average person an annual income of £7,500, according to PwC. Three months ago, that income had dropped to £6,500 and now you would get just £6,160."Many people retiring now will be caught between a rock and a hard place," says Peter McDonald, a partner at PwC. "If they defer buying an annuity until prices improve, they're stuck with no income in the meantime, which might not be an option."

In order to get the largest retirement income possible it is important you shop around before purchasing an annuity. Rates can vary widely between providers. You could boost your income by up to 20% if you take the time to find the best deal, says William Burrows, spokesperson for The Better Retirement Group.

Anyone who is still a few years from retirement should learn from the troubles facing today's pensioners. Make sure you start to move your pension investments out of equities and into less risky investments, such as cash, in the years before you are due to retire. This way you reduce the chance of your final pension pot being hit by a slump in the stockmarket.

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