By Maximilian Clarke

Recent equity falls are bolstering the gilts market, driving up the cost of purchasing an annuity and pushing down pension incomes.

A pension pot of £300,000 would this week convert into a pension income of just £18,500 per annum, calculations by PwC show. Three months ago the same £300,000 lump sum would have provided £19,500 pa, and only three years ago, when annuities were comparatively good value, it would have generated nearly £22,500 pa. Given equity heavy pension pots will in turn be worth less, PwC says pension incomes overall could be 30% less than they were three years ago

"Compared to only three years ago, a money purchase pension is now worth perhaps 30% less than it was,” said Peter McDonald, partner in the pension practice at PwC. “Many people retiring now will be caught between a rock and a hard place. If they defer buying an annuity until prices improve, they're stuck with no income in the meantime, which might not be an option. This huge reduction is due to a double-whammy of higher annuity costs and a smaller pension pot where investments hadn't switched out of equities before retirement. This could happen if someone finds themselves out of work unexpectedly - not an uncommon scenario in the current economic climate."

PwC points out that hikes in annuity prices make it more important than ever that people nearing retirement are given advice to help them find the best deal. Forthcoming changes to the ABI's annuity rules, which will prevent insurers including annuity purchase forms in their pre-retirement packs, should help encourage people to shop around rather than simply purchasing an annuity from the incumbent insurer. Employers and trustees in turn should have processes in place to help members purchase annuities when they retire.

"The first generation of people on defined contribution pensions is starting to come through,” added McDonald. “Luckily many will this time have alternative pensions as they may have only been in a defined contribution scheme for perhaps a decade. The same won't be true for future generations. A number of employers and trustees are recognising this and taking serious steps to advance warn members approaching retirement of the risks they face and the options they have to protect and maximise their income We expect Pension Regulator guidance due later this year to recognise this significant problem."

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