Retirement funds take a battering in FTSE drop
People nearing retirement are facing increased uncertainty amid the stock market turmoil that has wiped trillions off global share prices.
Eight million people in the UK have their pension fund invested in money purchase or defined contribution schemes, where the size of an annual pension is usually linked to how stock markets perform.
The FTSE 100 has fallen by more than 10% in a week, directly affecting many such schemes.
Laith Khalaf, pensions manager at Hargreaves Lansdown, 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."
The problem for these people has been made more difficult by the UK's emergence as a safe haven for overseas bond investors in the recent upheaval.
That has sent yields on UK government bonds, or gilts, to their lowest level in decades, which has hit the rates available on the annuities that people buy with their pension pots to provide an income for life when they retire.
Insurers use the interest rate paid on gilts to set annuity rates and after the fall in 10-year interest rates to 2.69% last week, a number of major providers such as Prudential, Legal & General (L&G) and LV= reduced them.
Annuity rates have already dropped by about 15% over the past three years, which has seen the annual average payout for a typical annuity fall from £6,770 to about £5,788 now. Last week, L&G reduced the typical annual income for a 65-year-old man with £100,000 in a pension pot to £5,500 from £5,900.
For people paying into final salary schemes, which pay a percentage of final salary on retirement, it is the pensions provider, usually the employer, that will have to absorb the falls in the stock market.
The burden of final salary schemes on employers has resulted in many schemes closing over the past 10 years.