The latest stock market turbulence has wiped trillions from global share values causing further uncertainty for millions of people approaching retirement. There are more than eight million people in the UK who have pension funds invested in money purchase or defined contribution schemes. These schemes are usually linked to the markets and the size of individuals’ annual pensions are determined by how robustly the stock markets are performing.

In the last few days the FTSE 100 index has plummeted by more than ten per cent – which has a direct impact on the performance of many pension schemes. Pensions manager for Hargreaves Lansdown, Laith Khalaf said, “Those close to retirement have greater cause for concern, though they may have been sheltered to some extent by de-risking their pension investments”.

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Drop in UK bonds yield means lower annuity rates

Another issue compounding the problems facing those saving for retirement is the fact that Britain is being seen as a ‘safe haven’ for bond investors from overseas. The perception that the UK is a safe haven has meant the yields on UK government bonds are at their lowest level in decades. In turn this has effected the interest rates that are currently being offered by pension providers with the annuities they sell. Annuity rates have been falling for several years and are just a fraction of what they were just ten or fifteen years ago.

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The interest rates paid on gilts are used by insurers to set the rates paid on annuities. After a fall in ten year interest rates down to 2.69 per cent last week several of the big pension providers, including Prudential and Legal and General, have further reduced their annuity rates.

Fifteen per cent drop in annuity rates in last three years

In just the last three years annuity rates have fallen fifteen per cent, seeing the average annual annuity income drop from £6770 to £5788. Laith Khalaf believes additional falls in annuity rates may be likely if the interest rates on UK bonds and gilts continue in their downward direction.

Final salary pension schemes are also coming under increasing pressure according to Mr Khalaf. Final salary schemes are usually provided by employers, and it is the employer who must absorb the drop in value of the stock market. The increasing weight of final salary schemes has proved too much for many employers to bear and only about a fifth of final salary schemes remain open to new members.

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