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31 January 2013 last updated
Buying annuities now made safer with US congress vote

The US Congress has voted to extend the debt limit by three months after being passed by the House of Representatives earlier this month means this threat is removed for people when buying annuities.

The approval of the bill to extend the $16.4 trillion debt limit was passed by the Senate by 64-34 votes. It was originally passed by the Republican-controlled House of Representatives by 284-144 last week.

It is likely that the US government will have another $450 billion to finance the interest on debts and meet Social Security and government salaries until May for further debate over the budget.

In the short term this postpones the problem and investors will be confident to remain equity markets and avoid purchasing government bonds and gilts. This means people in the UK retiring now and buying annuities will not be subject to this threat reducing their fund value or lowering the annuity rates.

 
Buying annuities safer with US Congress vote
 
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Higher risks for annuities in second quarter

Although markets are positive now annuity income in retirement could fall once further news unfolds in the second quarter which may impact pension fund values and annuity rates should investor confidence be undermined.

The US economy shrank unexpectedly by 0.1% in the fourth quarter last year after growing 3.1% in the third quarter. A deal was reached over the fiscal cliff that avoided $600 billion of spending cuts and tax rises costing citizens an additional $2,000 a year in tax. However, the deal will allow a tax increase called the payroll levy paid by both employees and employers. This has cost employees an average of 2% from their pay with the expectation of growth in the US reducing to 1% in the first quarter of 2013.

The deal did not include $100 billion of government spending cuts due in March and how this will impact equity markets. Already federal government defence spending is 22% lower and is having an impact on growth.

Investors have ignored the negative news on the horizon and are still positive from the US fiscal cliff deal at the beginning of the year. This is why the FTSE-100 index has had its strongest start to any year since 1989 reaching over 6,300. There is currently an expectation from investors of a rotation from bonds to equities partly fueling equity gains although the 15-year gilt yields have remained within a range of 2.48% and 2.63% for this month suggesting not much movement away from gilts.

For people retiring in the second quarter and remain invested in equities they should consider switching to a cash fund to protect any equity gains. This applies in particular if they cannot wait for a recovery and must buy their pension annuity, should there be a sudden fall in the equity markets.

News related stories:
Pension annuity income and equities rise after fiscal cliff deal
Annuities income reduce as equities fall with fiscal cliff deadlock
UK annuity income from pension funds boosted by fiscal cliff offer
Retirement annuity income kept high with Federal Reserve stimulus
Pension annuity income and markets lower with US fiscal cliff
Related internet links:
BBC - Congress vote to extend US borrowing
Telegraph - US House passes plan to extend debt limit
Reuters - US debt limit vote Obama likely to sign
BBC - US economy shrinks in fourth quarter
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