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13 February 2013 last updated
Enhanced annuity rates up 1.3% by Just Retirement

Enhanced annuity rates have been increased by 1.3% from provider Just retirement although there remains room for further increases as gilt yields are higher and should benefit people retiring.

Since the EU Gender Directive introduced unisex annuity rates last year annuities have been lower than expected even after taking into account gender neutral pricing.

The last enhanced annuity increase was from Partnership a few days ago and at that stage there was about 3.9% of gain possible. Since then the 15-year gilt yields have increased by 10 basis points to 2.76%.

Annuity rates are based on the 15-year gilt yields and as a general rule a 10 basis point increase would result in a 1.0% increase in annuities. This means that even with the increase today impaired annuity rates can still increase by a further 3.6% assuming that gilt yields remain at their current levels or rise.

 
Enhanced annuity rates1.3% up
 
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Impaired annuities can rise up to 5.6% further

For people aged 65 enhanced annuity rates could rise a further 3.6% and those aged 55 this rise could be 5.7% as providers discounted rates last year before gender neutral pricing was introduced.

The differences it the potential increase is due to providers discounting the rates for younger people more than older people. This may have something to do with the duration an annuity will be in payment, the risk to the provider and the numbers of pensioners taking benefits as about 98% take benefits between the ages of 55 and 65.

So far this year Just Retirement has increased their rates by 6.0% until the end of January and today by a further 1.3%. As an example a 69 year old male with a fund of £100,000 on a single life, level basis suffering from high blood pressure, Cholesterol, heart attack and angioplasty could buy an impaired annuity income of £7,960 pa after the decreases in December due to the EU Gender Directive. The current rises in annuities of 6.0% in January and 1.3% today would increase this figure by £5987 pa to £8,547 pa.

Gilt yields and equities higher will help annuities

The FTSE-100 index increased to 6,384 before closing 21 points higher for the day at 6,359. So far this year the index has increased by 462 points up 7.8% and represents the best start of a year since 1989 with the US Dow Jones index reaching 14,019 yesterday up 915 or 6.9%. Gilt yields were up strongly as an EU-US trade deal was announced that would help to increase the GDP of Europe by 0.5% or 66 billion euros a year and bring the economies of both countries back into growth.

The combination of increasing equities where an individual remains invested before retiring an increases annuity rates can greatly improve the income. Taking the above example, the £100,000 pension fund if it was invested in a fund tracking the FTSE-100 index would also have increased to £107,800 and the pension annuity would be £9,213 pa. Compared to the end of December, only six weeks ago, this represents an increase of £1,253 pa or 15.7% with further rises possible if gilt yields remain at current levels of improve.

The gains in corporate bonds and gilt yields have also helped final salary pension schemes to recover part of their deficit. As yields reduced due in part to the government Quantitative Easing (QE) programme this has increased the amount of money companies require to fund future liabilities, namely pensions taking their pension income. In January 2012 the amount all schemes were underfunded by was £265 billion and according to the Pension Protection Fund (PPF) this has reduced to £211 billion.

Before people buy their enhanced annuities they should convert their pension to a cash fund and avoid any sudden fall that could result in lower incomes if it is not possible to wait for markets to recover. Once an annuity is purchased if cannot be changed so a lower income would be paid for the individuals lifetime.

News related stories:
Buying annuity boosted as gilt yields rise after EU-US trade deal
Impaired annuity provider Partnership with 2% increase in rates
Impaired annuity rates up 3% as providers race to match rising market
Impaired annuities up 3.5% for second time by Just Retirement
Impaired annuity rates increase by 2.5% from Just Retirement
Related internet links:
Guardian - FTSE flirts with new five year high
BBC - Pension deficits fall back to £211 billion
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