Today's Coming Crisis Movie

Wednesday, August 10, 2011

Stock market mayhem wipes £100 a month off thousands of pensions

Thousands of people who are due to retire this month will find their pension income is nearly a fifth lower than what they expected a month ago because of the global stock markets crisis.

They are victims of a ‘double whammy’ – falling share prices and bond yields – which will combine to cut £100 a month off the income many of those entering retirement now will receive for the rest of their lives.

Pension funds are most people’s biggest exposure to stock markets.
Both their capital and the income it will produce has been hit by recent events. First, the value of retirement funds following the FTSE 100 index has fallen by 17pc in the last four weeks. Second, annuities – a form of guaranteed income for life, based on gilt yields – now pay 2pc less income than they did in July. Gilts are bonds issued by the British Government and prices have been pushed up in the panic because they are seen as secure but this cuts the income they pay, expressed as a percentage of their price today.

That’s a toxic combination for members of defined contribution or money purchase schemes, which have tended to replace traditional defined benefit or final salary pensions in the private sector. The new schemes rely on stock market returns, rather than employers’ promises, to build a fund which is largely used to buy an income for life in retirement. (more)