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26 February 2013 last updated
Enhanced annuity provider Liverpool Victoria with 2.6% higher rates

Provider Liverpool Victoria has increased their enhanced annuity rates by 2.6% after resisting the competition between Partnership and Just Retirement only to find 15-year gilt yields reducing by a further 12 basis points.

Annuity rates are primarily based on the 15-year gilt yields and the recent decrease of 9 basis points last week after the Federal Reserve comments that their Quantitative Easing programme increased economic risks coupled with the Italian election deadlock with a further 12 basis point fall places pressure on annuities.

Liverpool Victoria may be faced with decreasing their enhanced annuity rates if yields continue to fall as investor fear drives funds to safe havens such as US Treasury notes, German Bunds and UK government bonds and gilts.

People retiring should be careful to secure the longest guaranteed quotes to avoid decreases while their funds are being transferred if buying an open market option.

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Impaired annuity increases under threat from gilts

Both enhanced and impaired annuities have increased significantly closing the large gap with yields that developed during the EU Gender Directive introducing Unisex annuity rates. This year rates have been aggressively improved by over 7% based on yields increasing 45 basis points from 2.31% to a high of 2.76%.

As a general rule a 45 basis point increase in yields would result in a 4.5% increase in annuities which were a further 7.2% lower than yields before the year started. The improvements closed the gap but with gilts falling rapidly providers are likely to start decreasing rates and take a more cautious approach. This is unfortunate as it has taken the steam out of market which will would against people retiring now.

For those where Liverpool is the highest a 2.6% increase means the pension annuity can provide a greater income. For example, a male smoker aged 63 suffering from high blood pressure and high Cholesterol with a fund of £80,000 could purchase a single life, level annuity with an income of £5,756 pa and this will increase by £150 pa to £5,906 pa. Based on the Office of National Statistics (ONS) a male aged 63 will live for 19.3 years and the increase of £150 pa will improve his lifetime income by £3,088 while females with a longer life expectancy of 22.1 years generating £3,315.

Investor economic concerns pressure yields

The three major concerns in the last week are three economic threats to investors firstly the possibility that the US Federal Reserve will reduce the benefit stimulus, the Bank of England injecting a further £175 billion of Quantitative Easing (QE) and the Italian election deadlock.

These factors have helped to undermine investor confidence enough to seek safe havens for their funds such as US Treasury notes, German Bunds and UK government bonds and gilts. The fear is that if the US Federal Reserve curtails the stimulus package QE3 there will be significantly less liquidity in the equity markets and end the rent increase in the value of investments, including those held in pension funds before people buy annuities.

The Bank of England model for QE could be longer term injecting £175 billion and this would purchase gilts increasing the price and reducing yields, pushing down UK annuity rates.

The third economic threat is the Italian election deadlock where the parties that could form a coalition are against austerity which is a prerequisite for the European Central Bank (ECB) measures to support sovereign debt. If Italy does not meet this condition there will be no ECB support and hence the pillar of current eurozone economic stability, namely that the ECB will do "whatever it takes" to support the euro comes apart.

To have all the above in the same week is the reason why gilt yields have reduced 21 basis points and why enhanced and impaired annuities are likely to small, at least in the short term.

News related stories:
UK annuity rates rise 1.5% from Legal & General as gilt yields fall
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
Enhanced annuity rates up 1.3% by Just Retirement
Impaired annuity provider Partnership with 2% increase in rates
Impaired annuity rates up 3% as providers race to match rising market
Related internet links:
BBC - European markets fall after Italian election deadlock
Guardian - US uncertainty over QE3 threatens markets
Telegraph - QE may need to be raised by £175 billion
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