Experts on the new Solvency II rules being imposed on the UK pensions industry say that the new EU rules could see up to 20% being wiped off of pensioners’ eventual retirement income. In fact, a worker with £100,000 saved up could see their annuity, the guaranteed retirement income purchased with a pension pot, drop of £1,167 per year.

Experts predict that the new EU Solvency II rules will push down annuity rates that are already at record lows because of quantitative easing and trouble in the eurozone. It looks as though 2012 will be an even worse time to retire than 2011, a trend that has been in effect since the recession hit in 2008. Those who are set to retire soon can prepare themselves for the worst by using an annuity calculator. An annuity calculator is a tool that can be used to get a clearer picture of how much income your pension pot will provide, and can be used by anyone regardless of their age or proximity to retirement.

Solvency II

The Solvency II rules are set to take effect by January 2014, forcing pension funds to cut down on risk by buying more ‘safe’ investments like government bonds, also called gilts. The purchase of gilts has already been spurred by quantitative easing, which involves printing money as a way to inject cash into the economy. The money is then used to buy gilts, which pushes up their demands and pushes down their returns. With gilt yields suppressed since the Bank of England first started this policy in 2009, annuities have been in trouble for years now, and it looks like the market will only be getting worse.

While the reforms have been passed in an effort to make pension funds safer and cut down on the risk that they will go bust, the result is smaller pensions for workers that are set to retire in the near future. Since annuities will be negatively affected by this and annuities generally set a pensioner’s income for life, the great fear is that these rules could make pensioners poorer, permanently.

£100,000

There was once a time when a £100,000 pension pot could buy an annuity that gave an income of £15,000 or more. However, now the “ideal” retirement savings of £100,000 can only give an income of around £5,837 a year for the average pensioner, though annuities differ depending on gender and health situations. However, the regulations will push workers’ pensions down by anywhere from £292 to £1,1167 a year.

Ros Altmann, the director-general of Saga, said of the new EU Solevency II rules: “The EU rules will make the value of pensions fall further. It is a series of pieces of bad news for British pensioners.”
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