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13 February 2013 last updated
Buying annuity boosted as gilt yields rise after EU-US trade deal

People buying annuity in the next few months can expect higher annuity rates as the 15-year gilt yields have increased to the highest level for the year so far after it was announced Europe and the US pledge to create a new trading bloc.

The 15-year gilt yields increased by 10 basis points to 2.76% the highest for the year after an all time low was reached of 2.02% in August 2012.

The increased was helped by the announcement that Europe and the US have pledged to create the worlds largest trading bloc which could increase GDP by 0.5% or 66 billion euros a year in Europe and a similar amount in the US.

As annuity rates are based on the 15-year gilt yields a 10 basis point increase in yields would mean annuities can increase by 1.0%.

As pension annuity rates are lower than expected at the moment the pressure from gilt yields is likely to increase rates and the lifetime income for people retiring now.

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EU-US trade deal would help economy recover

The EU-US trade deal would remove trading barriers between the economies and is worth 455 billion euros a year. The deal would help to increase the Gross Domestic Produce (GDP) of Europe by 0.5% or 66 billion euros a year and bring the economies of both countries back into growth. This deal adds confidence to investors that the poor European economic environment can improve and if so, makes the high yields of 4.5% to 5.5% of countries such as Spain and Italy look more attractive.

During the eurozone debt crisis investors have moved funds to safe havens such as US Treasury notes and UK government bonds and gilts and this has increased the price and reduced the yields to record levels.

Europe is still struggling with debt, recession and unemployment although the fears of last year have been
subdued after the European Central Bank (ECB) said it would do "whatever it takes" to support the euro and buying the sovereign debt of member states and confidence has been increased with the US fiscal cliff deal that would have introduced $600 billion of spending cuts and tax rises in January costing citizens an additional $2,000 a year in tax.

Buying annuities will benefit in the medium term

Although more investor confidence may increase gilt yields and hence annuity rates in the short term, the real benefit is over the medium term as recycling of bonds to equities occurs. When economies return to normal growth rates and inflation this will reverse the past seven year trend where $600 billion flowing out of equities and $800 billion flowing into bonds.

The EU-US trade deal would help this process, however, there are may difficulties ahead mainly to do with regulation of different industries such as food, agriculture, insurance and finance. An agreement will be produced in one year and agreed upon after two or three years.

For people buying annuity in three years or more the benefit could be significant with the combination of rising equities and annuities although it is possible to take benefits now and return to the lifetime annuity later to take advantage of increases. If 15-year gilt yields return to previous levels it would mean an extra 16% of income from retirement annuities alone and equity growth in addition.

Buy purchasing a fixed term annuity a pensioner would be under capped drawdown rules and the pension fund or guaranteed maturity amount, known at the outset, would be provided at the end of the term. This could be used for another fixed term annuity, lifetime annuity using an open market option or drawdown.

Alternatively to benefit from future equity market gains an individual can use a with profits annuity or investment backed annuity. This would be suitable if pensioners have more than one personal pension fund or a final salary pension and are not dependant on a particular income as they would need to accept the slightly higher risk from this type of annuity.

News related stories:
Retirement annuities will benefit when the bond market crashes
UK annuity rates could increase as 15-year gilt yields reach new high
Best annuity rates set to rise as 15-year gilt yields up 22 basis points
Best annuity rates unlikely to increase despite Gilt yields rise
Related internet links:
DW - EU-US trade deal takes on shape
Telegraph - Europe and US pledge to create trading bloc
BBC - EU and US free trade talks launched
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