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4 April 2013 last updated
Best annuity income prospects improve with strong service sector data

An improvement in the service sector data suggests that the UK will avoid a triple-dip recession avoiding the need for the Bank of England to opt for another round of Quantitative Easing which improves the prospects of the best annuity income for people retiring.

UK annuity rates are based on the 15-year gilt yields and any change will have impact the best annuity income at retirement.

The level of yields will fall when the price of gilts increases and the Bank of England's Quantitative Easing programme specifically buys gilts to increase the supply of money to the economy, thereby reducing yields and income from annuities.

The purchasing manager index (PMI) for the service sector has improved to 52.4 up from 51.8 where a figure over 50 indicates expansion and below contraction and as services represent 93% of the UK economy the results can influence action taken by the Bank of England.

 
Best annuity income improves with services data
 
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Annuities to avoid more Quantitative Easing

The current level of Quantitative Easing (QE) is £375 billion which the Monetary Policy Committee (MPC) decided not to extend and to keep interest rates at a record low for four years of 0.5%. The Chancellor George Osborne changed the BoE's mandate slightly by allowing it to ignore the level of inflation for one-off factors when setting QE levels.

Quantitative Easing increasing the supply of money into the economy and tends to increase inflation over time. The Bank of England has a target for inflation of 2% and by being able to ignore this can take short term measures which could include for QE. When the Bank of England introduced £50 billion of Quantitative Easing in July last year the 15-year gilt yields reduced to an all time low in August of 2.02% followed by pension annuity rates.

Yields had reached a high for the year of 2.76% with growing optimism about the global economy, however, yields have fallen back to 2.28% with a four basis point fall today which could impact annuity rates.

At previous MPC meetings three of the nine members voted for more QE of £25 billion and for mow people retiring to buy annuities can remove this threat. If the service figures were poor the UK would have entered into a triple-dip recession and the prospects for UK annuity rates would have been negative. The results of the data indicate that the UK economy increased by 0.1% in the first quarter of the year after contracting 0.3% in the fourth quarter last year.

Increasing annuity income at retirement

With annuity rates just above their all time lows reached in January people retiring should be aware of the ways they can increase annuity income to above the standard lifetime annuity rates.

For those that suffer from lifestyle medical condition such as high blood pressure, Cholesterol, are a smoker or are overweight they could receive up to 18% more income from an enhanced annuity. For more severe medical conditions such as diabetes, heart conditions or cancer an impaired annuity can increase incomes by up to 40% over standard annuities.

For people in good health initial incomes could be 30% higher than the standard rates using a with profits annuity or investment backed
annuity. This type of option is more suitable for those with other pensions os a final salary scheme as the risks are slightly higher since the income can go down as well as up over time. It may take 20 years for this income to fall to the level of a standard annuity so is useful for people that would like as much income now while they are healthy and can enjoy the extra money from an annuity.


News related stories:
UK annuity income higher as service sector and markets improve
Pension annuity income outlook good as service sector grows
Best annuities threat after UK service sector output falls
Pension annuity rates threat of £175bn QE from Bank of England
Current annuity rates may increase with no QE stimulus proposed
Annuity rates under threat as Bank of England injects £50 billion of QE
Related internet links:
Guardian - Strong services data avoids triple -dip recession
Telegraph - Services PMI data signals UK to avoid triple-dip
Telegraph - Bank of England holds QE at £375bn
BBC - UK service sector sees growth from PMI survey
SM - UK services sector growth avoids triple-dip recession
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