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8 July 2013 last updated
Pension annuity boost as equities and yields up with US jobs data

Pension annuities were given a boost after US economic data showed more jobs were added then expected as fears of a stop to the US stimulus sent bond and gilt prices lower with yields higher.

As 195,000 jobs were added in the US exceed expectation as well as revised data adding a further 70,000 jobs for April and May indicating a recovery in the US economy the Dow Jones index has rallied up 236 points at 15,225 after two days.

Annuity rates are primarily based on the 15-year gilt yields which have increased by 9 basis points today. Investors feared the good news would mean an early end to the US Federal Reserve $85 billion per month package. The bond and gilt market has been kept high with this extra liquidity and any suggestion of QE being reduced or ending has decreased prices and increased yields.

The higher yields means people retiring can be assured for the moment that rates will remain at current levels or increase as standard pension annuity rates have some room for improvement.

Pension annuity boost with US jobs data
  With yields back up to 3.04% pension annuities have been given a boost and could rise
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Standard rates could rise 2.3% with higher yields

At the beginning of the month standard annuity rates still had room for improvements and have been given a boost as the 15-year gilt yields rise 9 basis points. As a general rule a 9 basis point increase would mean a 0.9% increase in rates, in addition to the 1.87% we were already expecting.

Assuming yields remain at this level standard annuities could rise by 2.37% on average. This would mean our benchmark example for a person aged 65 with a fund of £100,000 could see an increase in the income from a single life, level annuity of £138 pa from the current level of £5,815 pa to £5,953 pa.

The Office of National Statistics (ONS) would expect a male to live for 17.3 years and over his lifetime the reduced income would be £2,387. For females they are expected to live for 20.4 years increasing their income by £2,815.

Federal Reserve to continue with stimulus package

The markets are expecting a rise in interest rates and bond yields if the Federal Reserve reduce and stop the $85 billion stimulus package. This would mean higher annuity rates in the future however the Fed have indicated they would not take action until the level unemployment has reduced to less than 6.5%, and it has remained at 7.6% today with 4.3 million Americans out of work.

It is likely that the stimulus will continue until the end of 2014 so there will be volatility in the bond and equity markets for another year. This could mean gilt yields falling again to lower levels so the combination of higher annuity rates and equities now is attractive for people taking their benefits now.

Annuity rates have increased since reaching an all time low in January with our benchmark example of a 65 year old with £100,000 buying a single life, level annuity of £5,373 pa and have increased £442 pa or 8.2% to £5,815 pa. For those people that remain invested before retirement equity markets have also increased by 553 points or 9.3% from 5,897 to 6,450.

This combination of annuities and equities rising means an income of £5,373 pa in january 2013 has now increased to £6,355 pa or an extra £982 pa or 18.2%. For those retiring this would mean extra income over their lifetime and for a male aged 65 living for 17.3 years this would be £16,988 and for a female living another 20.4 year an additional £20,032.

News related stories:
Best annuity rates could rise 8% as gilt yields soar 39 basis points
Annuity income and equities reduce as Fed plans to stop stimulus
UK annuity income 7.7% lower as US Federal Reserve considers stimulus
Annuity rates to increase 2% as gilt yields rebound on US jobs data
Latest annuity rates may fall 4% as gilt yields collapse after US jobs data
Related internet links:
BBC - Positive US jobs add to rate rise speculation
Guardian - US jobs boom fear Fed may stop stimulus
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