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24 May 2013 last updated
Best annuity income 2.7% lower as UK equity markets tumble

The FTSE-100 index has reduced 185 points in the last two days to 6,654 after the Federal Reserve warning over QE and a drop in Chinese manufacturing resulting in a 2.7% fall in the best annuity income where people remain invested at retirement.

Initially the Federal Reserve suggested they may end Quantitative Easing where $85 billion per month is providing liquidity to support equity markets. Japan's Nikkei index was lower by 7.3% after recent all time highs being reached.

Weak manufacturing data from China suggested a slowdown was possible as factory output contracted for the first time in seven months. The purchasing Managers' Index (PMI) for May reducing to to 49.6 where a figure below 50 indicates a contraction.

People retiring that remian invested have gained as markets rise but also risk sudden falls before before buying their annuities at retirement.

 
Best annuity income 2.7% lower
 
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Lower equities wipes out recent annuity gains

Equity markets had increased 15.9% since the beginning of the year with the FTSE-100 index up 943 points from 5,897 to end at 6,840, a 12 year high before correcting. The markets are sensitive to economic information creating volatility which can easily impact on pension fund values lowering income from pension annuities.

Despite the falls in UK equities the gains remain high since the start of the year up 12.8% and coupled to rising annuity rates which are higher by 4.6% people buying now will still find the best annuity income to be significantly higher than four months ago.

Taking our benchmark example of a 65 year old with a fund of £100,000 buying a single life, level annuity in january of £5,373 pa this will now be higher. A pension fund tracking the FTSE-100 index would be at £112,800 and the income with higher annuity rates has improved to £6,345 pa. It is however £179 pa lower compared to the the highest income this year achieved a few days ago of £6,524 pa.

Investors fear Quantitative Easing will stop

Markets have been rising as investors expect central banks in the global economy to continue with Quantitative Easing which involves printing money, buying bonds and gilts thereby driving up the price and reducing the yield as well as keeping interest rates low. The rise has been helped with Japan and it's $1.4 trillion QE programme to stimulate the economy driving the Nikkei index almost 100% since November 2012 and 50% higher this year.

Surplus funds are used to find higher yielding investments including purchasing equities, however, Ben Bernanke of the Federal Reserve hinted the QE programme could be reduced and minutes from the Fed's policy meeting showed some members suggesting from as early as June.

For people retiring that have benefited from the rise in equities who want to avoid exposure to volatility before they purchase Uk annuities, should consider converting their fund to cash. It can take four or more week to transfer funds using an open market option and the risk is that equities could suddenly fall before this happens. If people do not have the time to wait for a recovery, they will be forced to accept a lower annuity income.

News related stories:
 
Annuities income boost as FTSE index and service sector improve
UK annuity income gains with FTSE-100 index 2% higher
Retirement annuity income up as FTSE-100 index reaches a new high
Annuity income lower as markets and gilts fall on Italy election deadlock
Best annuity income and markets fall 1.6% after US Fed stimulus fears
Related internet links:
BBC - Global markets hit after Chinese data and Fed Comments
Telegraph - FTSE 100 suffers heaviest drop for a year
Guardian - Stock markets lose nerve on fears of end of QE
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