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18 June 2013 last updated
UK annuity income 7.7% lower as US Federal Reserve considers stimulus

Markets are lower reducing UK annuity income by 7.7% where people remain invested as markets worry over the next Federal Reserve policy meeting which may curtail the stimulus measures that have been driving global indices higher.

The most recent data shows that the US economy added 175,000 jobs last month resulting in a gain in equities as this suggests the worlds largest economy is recovering.

On the other hand it takes the US Federal Reserve closer to the point where they can reduce their $85 billion a month stimulus measures.

With a meeting on the 19 June investors have been worried this could be the beginning of the end of liquidity driving global markets higher so far this year.

People retiring have benefited with higher UK annuity income from the gains with the FTSE-100 index rising 15.1% this year to a high of 6,840 before reducing in the last three weeks by 532 points ending at 6,308.

UK annuity income 7.7% lower on Fed stimulus
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Timing has impact on annuity income at retirement

Most people remain invested before buying their annuities and since the high this year on 22 May the market has reduced 7.7% which will be reflected in annuity income for some people. This would mean a person aged 65 buying an annuity on a single life, level basis with a fund of £100,000 could have received an income of £5,671 pa and this has reduced to £5,234 pa, a fall of £437 pa. Based on the Office of National Statistics (ONS) a male will live for 17.3 years and over his lifetime the reduced income would be £7,560. For females their life expectancy of 20.4 years reducing their income by £8,914.

Despite the recent falls, gains have been significant after the FTSE-100 index reached a low of 4,944 in October 2011 and increased 38.3% to reach the high for the year of 6,840. The gain has helped people that remained invested right up to the point of buying their pension annuities to offset the significant falls in annuity rates and allow them a higher income.

For example since October 2011 the increase in equities has been 27.5% and after taking into account the fall in annuities people can expect 18.6% more income from their fund. For a male aged 65 this would mean a fund of £100,000 would have increased to £127,500 if it tracked the FTSE-100 index and after taking into account the fall in annuities the income would rise from £6,093 pa to £7,230 pa, an increase of £1,137 pa. Based on the Office of National Statistics (ONS) a male aged 65 will live for 17.3 years and over his lifetime the extra income would be £19,670.

By contrast, taking a longer period of time since the beginning of the financial crisis from July 2008 equities are higher by only 16.5% and after the fall in annuity rates people taking their income are worse off by 16.4%. This is an example of how timing can make a significant difference to someone's income in retirement.

US Federal Reserve and budget cuts dominate

The US Federal Reserve will reduce the level of stimulus from its current $85 billion a month, a form of Quantitative Easing where bonds are purchased increasing liquidity into the economy, when unemployment reduces. Markets are watching to see if any comments from the Fed suggests a change and this has created instability in soaring equity markets.

In particular the Tokyo Nikkei has lost over 20% of its value in the last three weeks is in part due to doubts about Japan's bond buying programme to counter deflation. The fall spread to other Asian countries and then to Europe, the UK and US markets.

In addition the International Monetary Fund (IMF) has questioned the US over its federal budget cuts designed to help reduce the $16.4 trillion US debt. The IMF estimate that US growth could have been 3.65% this year instead of the forecast of 1.9% due to the cuts and the slowdown could continue in the medium term. There would be a knock-on effect around the world holding back other economies from recovering and slowing down Asia.

For people retiring it would be worth waiting a little longer until the Federal Reserve policy meeting on 19 June as it is likely they will decide a slow reduction in stimulus which would mean a recovery in equity markets. Gilt yields remain high at 2.64% with retirement annuities increasing and it is still a good time to take benefits.

News related stories:
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
Best annuity income and markets fall 1.6% after US Fed stimulus fears
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Related internet links:
BBC - Markets fall on EU and US worries
Guardian - US economy adds 175,000 jobs
BBC - IMF questions US budget cuts
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