euro melting flagWolfgang Kumm/DPA/Press Association Images

New rules are being brought in by the EU in an effort to improve the way pension companies operate. However, according to a new report, one major side-effect of the changes is that pension incomes are going to be clobbered.

So why is this happening, and what can you do?

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Incomes to fall

The report, from business advisory firm, Deloitte, has predicted that the effect of the legislation will be to cut annuity rates dramatically - by between 5% and 20%. For a pensioner with a £100,000 pension fund, these changes could reduce their income by between £300 and £1,100 a year

The reform in question is known catchily as Solvency II. It is being brought in to try to make all financial companies operate more safely. A big part of the legislation will be to force insurance companies (who provide pensions) to hold more cash in their reserves in case of a disaster - this will automatically make them less generous.

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Another part of the new rules is that pension companies will have to invest more safely. This will mean switching investment from corporate bonds into something even less risky - with correspondingly lower returns.

Richard Baddon, insurance partner at Deloitte, said: "It is likely that insurance companies will need to charge more in future for annuities. If there is an unfavourable outcome in relation to [ongoing negotiations] the impact may be very significant."

Other blows

He added that this isn't the only major change affecting annuities, because by the end of the year pension companies will need to implement the EU roles on gender discrimination, which means products cannot be priced differently for men and for women. This is likely to mean that annuity rates fall for men and rise for women.

At the same time, Saga has been sounding the alarm about the impact of quantitative easing on annuity returns, which is already pushing incomes to new lows. Dr Ros Altmann, Saga Director General explains: "UK pensions are unusually dependent on gilt yields, since most people retiring with defined contribution pensions (personal pensions, stakeholder pensions and other non-final salary-type schemes) buy annuities to secure their pension income. Lower gilt yields mean lower annuity rates. Anyone who bought an annuity in recent years at artificially depressed rates resulting from QE will be permanently poorer for the rest of their lives."

What can you do?

For years the news on annuities has been steadily and unrelentingly bad, and it looks like things aren't going to get any better soon. However, the Deloitte research did sound one positive note at least. Baddon said: "Although this all appears to be bad news for annuitants our research also shows that there are some current opportunities for consumers. We identified that there is a spread of at least 15% in annuity rates that can be bought today, which shows how important it is for consumers to shop around when buying an annuity."

Tom McPhail, head of pensions research at Hargreaves Lansdown adds: "There are two somewhat contradictory strategies which investors can adopt today. If you are very close to retirement, perhaps within the next year, then you may well want to buy your annuity sooner rather than later (today wouldn't be too soon)."

"If you are willing and able to defer annuitizing for an uncertain period of time which could extend into years, then it may be advantageous to wait until rates improve. This could mean having to wait for years or only a few days. It is impossible to predict when or to what extent Gilt yields will recover."

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