3 August 2012 last updated

Retirement annuities for pensioners benefit from equity market surge

Equity markets gain after the ECB plans are re-assessed will help retiring pensioners increase income from their annuity purchase. The surge in equities today will be welcomed by pensioners retiring now as many funds remain invested in volatile equities right up to the point of purchasing annuities. Any increase in equities means they will have a larger fund and increase their income at retirement assuming annuity rates remain level and do not decrease. After the uncertainty yesterday about the European Central Bank (ECB) president Mario Draghi's statement to support sovereign countries and their debt crisis, markets have re-assessed the position and are more optimistic about it's ability to support the euro. Confidence is an important element of the efficient functioning of the bond market so if markets believe the ECB will provide a safety net for solvent countries there may be sufficient investors buying bonds to drive yields lower without the ECB required to make significant bond purchases.

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More income for pensioners in retirement

Equity markets are higher with the FTSE-100 index up 125 points to 5,787, dow Jones up 217 points at 13,096, Germany up 3.9%, France 4.3% higher and Spain 6% higher. This was also due to the better than expected employment news from the US with 163,000 new jobs added in July compared to only 64,000 in June. The markets ignored poor figures from the UK where the purchasing managers index (PMI) for services decreased to it's lowest level for 19 months to 51.0 in June, down from 51.3 in May. If the figure is above 50 it means activity is increasing and if it is below activity is decreasing.

For pensioners that remain invested in equities before purchasing their pension annuity, the rise in equities since 25 July of 289 points or 5.2% will mean an increase in the income they will receive from an annuity, assuming annuity rates remain the same. For a male aged 60 with a fund of £100,000 could receive a single life level income of £5,224 pa and after the increase in equities the fund would be £105,256 which could purchase an annuity of £5,498 pa or an increase of £274 pa. The life expectancy of a male attaining the age of 60 is 20.99 years according to the Office of National Statistics (ONS) so this would result in an extra income of £5,751 over the pensioners lifetime.

Gilt yields up positive for annuities

In contrast to yesterday gilt yields increased significantly with the 15-year gilt yields up 10 basis points to 2.12%. This is likely due to investors re-assessing the ECB statement with funds returning to Europe reducing the price of UK government bonds and gilts and increasing the yields. As annuity rates are mainly based on gilt yields a 10 basis point increase in yields would eventually result in a 1% increase in annuity rates. See Annuity Rates Review for the latest updates.

The combined effect of increasing equities and annuity rates over a long period of time would significantly increase the income a pensioner would receive in retirement. As both equities and gilt yields are very volatile at the moment there at risks for pensioner taking their benefits and they could easily find they receive a lower income from their lifetime annuities.