With Solvency II receiving the green light to go ahead in 2012, pensioners could be facing a 30 per cent drop in retirement income, which could get worse, warns Annuity Direct.

Solvency II, legislation which aims to lower risk across pan-European insurance players, has been approved by Brussels and Annuity Direct believes that 500,000 pensioners face a huge plunge in annuity rates post-2012.

"The Eurocrats are determined to reduce perceived risk within the pensions giants, such as Prudential, L&G and Aviva in the UK," said Bob Bullivant, CEO at Annuity Direct.

"From 2012 life companies will be obliged to value their annuity liabilities using government gilt rates, rather than the current preferred option of corporate bonds, which give a higher yield.

"The result of this lower income to the life giants means they will have to hold more capital to meet their annuity pay-out liabilities - and the knock on impact is that annuity rates will fall, with most insider estimates being anywhere between 20 per cent and 30 per cent. It looks very bleak for annuities post 2012."

Anyone who is currently at retirement age and eligible to swap their pension fund for an annuity income should do so as soon as possible, advised Bullivant, and not hope that things will get better in the future.

"Pensioners need to be aware that if they defer their annuity purchase, they now need to take account not only of the loss of income during the deferral period, but also the probability of a fall in rates in the not too distant future.

"And those pensioners currently in an 'income drawdown' arrangement - where they have deferred taking a full annuity but take income from their pension fund - should review it as soon as possible."

Bullivant added that some insurers already appear to be wary of the effects Solvency II will have on their business: "Prudential and Aegon, for example, are no longer as competitive as they have been in recent years on their annuity rates, which suggests to me that they are already stocking up their war chests in order to build the necessary capital reserves which will be required once the new law goes live."

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