Millions will see pensions slashed by up to 20% as new EU rules are set to send annuities plummeting

Millions of people could see the value of their pensions slashed by up to 20 per cent because of new EU rules.
Those with a £100,000 pension fund could be more than £1,100 per year worse off in retirement because of the reforms, research has shown.
The Solvency II rules, which are due to come into effect in January 2014, will force pension funds to hold a higher proportion of 'safe' Government bonds.

Historic lows: The returns on Government bonds have fallen to record lows - which will hit pensions when new EU reforms are brought in

As the bonds - called gilts - have such low rates of return it will drive down the returns on retirement fund annuities, which are used to pension income.
The reforms are designed to make pension funds safer and reduce the risk of them going bust.
Annuities, which set retirement income for life, have already fallen to historic lows because of the impact of quantitative easing.
At present, a pension annuity fund may invest 20 per cent in low-yield gilts and the rest in riskier corporate bonds which have a higher rate of return.

But under the new EU rules, annuity funds will be forced to hold a higher percentage of gilts.
New research by Deloitte suggests annuity rates will plunge by between five and 20 per cent when the directive comes into force in January 2014.
A £100,000 pension pot currently gives an income of £5,837, but once the regulations come into effect they will be between £292 and £1,167 a year worse off.

Plummeting pensions: New EU rules forcing funds to hold more Government bonds could see millions worse off in retirement

The return on government bonds has fallen in value because the Bank of England's quantitative easing programme has involved buying them up to inject an extra £325bn into the economy and investors are moving their funds from risky countries like Greece to Britain. This extra demand drives up their prices but consequently means that interest rate yields plunge.
Yields have fallen to historic lows, and the situation could get worse.

HOW NEW EU PENSIONS RULES WILL HIT INCOME IN RETIREMENT

The Daily Mail City team looks at the effects of the new EU rules that could force companies to hold more capital in case of emergency.
Glue-sniffing?
Solvency 2, not solvent abuse. It is a controversial new set of rules for insurance companies from the European Union.
Shouldn’t all firms stay solvent?
Yes. In the case of insurance companies, regulators like to know they have enough money to pay pensions, car insurance claims and the like.
So why the new rules?
At the moment there are different solvency rules across the EU, and the authorities would like to harmonise.
Any other problems?
There are worries that Solvency II might force insurers to hold more capital against annuities, which would mean smaller pensions – another blow for people retiring.

Dr Ros Altmann, director-general of Saga, said: 'As a result of quantitative easing which has forced gilt rates down so pensioners are getting less in retirement for the money they have spent their whole lives saving.
'The EU rules will make the value of pensions fall further. Its a series of pieces of bad news for British pensioners.
'As a result of these rules everyone will get much less pension out of their fund. We don't know exactly how much less.
'We are anxious that the UK Government should stand up for UK pensioners.'
She added that plunging annuity rates are putting young people off saving for retirement.
In a double-whammy for male pensioners, new rules banning gender discrimination could hit retirement incomes.
At present, men get higher annuities because of their shorter life expectancies.
Richard Baddon, insurance partner at Deloitte, said: 'Annuity rates will also be affected by the EU gender ruling, due to be implemented at the end of the year.
'Men and women will be offered the same rates and although it isn’t yet clear how this will impact insurer pricing, it could mean that annuity rates fall for men and rise for women.'

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