Pensions hit by financial crisis

Tuesday, 14 October 2008

The financial crisis has had a devastating effect on private pensions, with all those linked to the stock market, having an average of £20,000 wiped off their values.

People who are about to retire will be worst hit by the stock market crash. Some could lose 20% of their prospective income for life. People who decide to hang on and work longer will have to work for five more years to recover the value of their pensions to last month’s level.

The country now has a ‘huge pensions gap’, according to the Conservatives.

Most retirees have to use their pension fund to buy an annuity, which will provide income for the rest of their life. Obviously the bigger the fund the higher the income will be, but last week the average money purchase scheme lost 10% of its value as the FTSE 100 index suffered devastating losses.

Those who are about to retire are in the worst position because they can probably do nothing further about it. Annuities must be purchased by the age of 75; once bought they cannot be traded in any way; and they expire when the holder dies. Despite the 75 age limit, most money purchase schemes mean that the retiree must buy an annuity upon retirement. Conversely, income drawdown is when pensioners can keep their retirement savings invested and take an income each year until they reach 75.

Figures from Standard Life suggest that a month ago a 65-year-old male with a pension fund of £200,000 might have expected an annual income of £15,480. Now, that has been reduced by £2,000 a year.

Those who previously opted for income drawdown will also be hit, as on average 70% of their fund is invested in the stock market.

Chris Grayling, the Tory Work & Pensions spokesman, called for the Government to suspend the annuity rule so that people aren’t forced to make decisions that will affect the rest of their lives in the current financial chaos.

Even those with final salary schemes may not be immune. There are two million private sector employees still on final salary schemes, compared with 7.2m in money purchase schemes. However, the stock market collapse may result in companies struggling to pay for guaranteed final salary pension schemes in the next few months.

It is a stark indication of how worldwide financial events can affect ordinary families with no influence on these tumultuous events.

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