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7 March 2014 last updated
Pension annuities rise possible as Ukraine crisis subsides

The prospects for pension annuities has improved as the crisis in Ukraine subsides with equity markets and gilt yields recovering after investors moved funds to safe havens such as US Treasury notes and UK government bonds.

Annuity rates are mainly based on the 15-year gilt yields and reached the lowest for the year of 3.11%, after Russian troops entered Ukraine territory. The last time yields were at this level was the beginning of November 2013.

After the Russians had pulled back forces on an exercise away from the border of Ukraine, markets recovered with the FTSE-100 index up 115 points and Dow Jones up 228 points at 16,396.

Since the low earlier in the week gilt yields have increased 11 basis points and as a general rule this could translate into a 1.1% increase in annuities.

However, as uncertainty exists in Ukraine it is likely that providers will wait and see how the situation unfolds in the next few weeks before taking action.

 
Pension annuities rise possible
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Standard rates lagging behind yields

Standard pension annuities have been lagging behind the 15-year gilt yields for the past year. Our benchmark example below shows how the rate is at the lower end compared to any of the past 7 months, even though gilt yields higher.

  Benchmark annuity rates and gilt yields
  Sep Oct Nov Dec Jan Feb Mar
Rate £6,159 £6,009 £6,196 £6,184 £6,051 £6,037 £6,037
Yield 3.09% 3.04% 3.21% 3.42% 3.16% 3.17% 3.22%


In the short term we would expect annuities to increase by a further 0.41% but over the medium term of three months this could be an increase of 1.54% when compared to yields.

For our benchmark example of a person with £100,000 buying an annuity on a single life, level basis this would add £93 pa to £6,130 pa. In terms of lifetime income, the Office of National Statistics (ONS) would expect a male to live for 17.3 years and he will have £1,608 more over his lifetime. For a female she can expected to live for 20.4 years increasing her income by £1,897.

Global uncertainty keeping rates low

The recent crisis in the Ukraine is likely to keep rates artificially low in the short term although markets are relieved that Europe and the US are more inclined to talks than escalating the response. At the moment more damage has been sustained by the Russian stock market with one of it's largest one day falls and currency forcing Russia to raise interest rates from 5.5% to 7.0%.

There remains positive economic data with the US economy adding 175,000 jobs suggesting the Federal Reserve will continue to taper the stimulus package. The stimulus package is now at $65 billion having been reduced twice by $10 billion from the previous high of $85 billion.

This would mean less funds buying bonds, lowering the price and increasing the yields in the future to the benefit of people buying pension annuities.

News related stories:
Annuity rates 2% lower from Legal & General surprises market
Best annuities threat as gilt yields fall after poor US jobs data
Related internet links:
Guardian - Ukraine crisis sends Russian stock market tumbling
BBC - Markets fall on Ukraine tensions
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