Market crash means pensions and ISAs drop in value by over 10%

Friday, 23 September 2011 03:46

The slide of stock markets over the past few months has had a catastrophic effect on the pension income that buying an annuity can bring.

If an individual was retiring today and buying a pension, the income they will receive is 14 per cent lower than if they had purchased the annuity at the start of the year, according to research conducted by investors Hargreaves Lansdowne.

The falling share values and annuity rates mean that a 65-year old retiring today with a pension pot of £100,000 would only be able to purchase an annuity that provided an annual income that was £926 lower than was available in January.

There has been a similar drop in value in shares Isa’s. An ISA account worth £20,000 at the beginning of 2011 would now be worth just £17,556 if the ISA holder cashed in their investment today.

The figures provide a body-blow to savers who rely on their investments to supplement their income. Many traditional savers have moved their capital to investment vehicles as the rates available on traditional savings accounts from banks and building societies has been so low since the Bank of England cut base rate to 0.5 per cent over two and a half years ago.

Pension savers often have a large element of their pension pot whose value depends on the performance of the stock market. These have shrunk at an alarming rate as has the return available from purchasing an annuity.

Get a free guide to pensions from Hargreaves Lansdown.

The research from Hargreaves Lansdown states: “Level annuity rates are now lower than they have ever been; for a 65 year old man the yield is now just over 6% (for comparison, in 1990 it was 15%).”

The research highlights the dilemma facing those who have started to drawdown on their pension. Hargreaves Lansdown says: “Drawdown income limits have been cut by the combined effect of falling Gilt yields and a Government imposed reduction to the maximum income (from 120% of an annuity to 100%).

“The result of these is that income limits are now 20% to 30% lower than 5 years ago. Some Drawdown investors have been drawing an income at the maximum level for the past few years; they could now be facing a cut in income of as much as 50%.”

The research offers this advice for those already taking an income. “If you’re in Drawdown already and you’re going to have to take a cut in income then the sooner you do it, the better; if you’re in a hole then stop digging.

And for investors who have reached retirement age and are trying to decide if they should wait or buy now, the research suggests: “Delaying for a year in the hope of getting a better income probably won’t pay off.”

If you are unsure on what to do with your pension or annuity it is advisable to contact an Independent Financial Advisor.

Follow Myfinances.co.uk on Twitter: @news_myfinances

Use the Myfinances.co.uk comparison tables to find the best deal on a pension or annuity.

Sign up to the Myfinances.co.uk newsletter to receive the latest financial news direct to your inbox.

• Tags:
• annuity
,
• isas
,
• news
,
• pension deficit
,
• retirement income