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17 April 2012 last updated
UK annuity income to benefit from buoyant equity markets

As world equity markets recover UK annuity income will benefit with larger pension funds for pensioners retiring and purchasing annuities.

Equity markets in the UK, Europe and US have seen some strong gains after significant falls earlier in April with uncertainty over the Eurozone. The FTSE-100 index was up 100 points at 5,766, the Dow Jones index up 194 to 13,115 and European markets were higher by between 0.7% and 2.7%.

Initially the FTSE-100 index increased due to better than expected demand for Spanish 10-year bonds even though yields increased which is usually a sign of higher risk for investors. This was following by positive US housing start data which helped to increase equity markets in the US and also the UK.

Pensioners will benefit as most remain in equities up to the point they buy their pension annuities as their pension funds will in most cases be larger.

 
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Pensioners relief with higher annuities

These equity increases will be a relief to pensioners still invested in equities with the intention of taking their benefits and purchase annuities. The FTSE-100 index had reduced from 5,875 to 5,596 or 4.7% during April and this decrease means pensioners with exposure to equities would see their pension fund and also income reduce by this amount.

For example, a male aged with a fund of £100,000 could purchase a single life annuity with no guaranteed period and on a level basis and receive an income of £5,611 pa but 8 days later this would reduce to £5,347 pa or a fall of £264 pa. Over his expected lifetime of 17.4 years the total income lost would be £4,646 which is significant and as a result of global events creating market fear, in this case Spain's debt problems. Where equity markets are high to avoid volatility pensioners should consider moving their pension fund to cash.

Apart from an increasing fund pensioners can receive up to 30% higher initial incomes than the standard open market option by if using a with profits annuity or investment backed annuity. Pensioners may be able to accept the slightly higher risk if they have other pension income such as a final salary pension or more than one personal pension fund.

If pensioners suffer from lifestyle medical conditions such as high blood pressure, Cholesterol, are a smoker or are overweight a higher income may be paid with an enhanced annuity. If they suffer from more serious health conditions such as diabetes, heart conditions or cancer an impaired annuity can be considered offering incomes of 40% higher than the highest standard annuities.

Risks still persist for UK annuity income

The International Monetary Fund (IMF) has said that the economic recovery is fragile and there is a risk that the debt crisis could return sending the global economy back into a global recession. In particular if Greece was to leave the euro currency or there was an uncontrolled default of debt this could see the financial crisis returning and too much austerity could also do damage. This would result in investors moving funds to safer havens such as government bonds and gilts increasing the price and reducing yields with the outcome being lower UK annuity income for people retiring. However, today gilt yields have moved upwards with the 15-year gilt yield up 6 basis points to 2.64%.

The Consumer Price Index (CPI) a measure of inflation has stopped falling with a small increase from 3.4% to 3.5% according to the Office for National Statistics (ONS) which would suggest the Bank of England may not hit it's target of 2.0% this year. The Retail Prices Index (RPI) also increased from 3.6% to 3.7%. This means it is very unlikely that the Bank of England will introduce Quantitative Easing (QE) as this would increase inflation so pensioners will benefit as QE depresses gilt yields and therefore annuity rates.

News related stories:
UK annuity rates fall as Eurozone fear spreads to markets and gilts
Annuity income at risk as gilt yields and markets fall sharply
Best annuity income threat to pensioners as equities fall
Annuities income and pension fund up as Wall Street hits four year high
Retirement annuities income dealt a blow as equities fall worldwide
Pension annuity income boosted by equities gain
Related internet links:
Guardian - Risk to global economic recovery says IMF
BBC - UK inflation rates rises to 3.5%
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