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1 March 2013 last updated
Highest annuity income could fall with poor manufacturing data

UK manufacturing data shows a contraction and increases the chance of the UK economy recording a triple-dip recession for this quarter which could threaten the strong growth in equity markets, the value of pension funds and income from annuities.

The Purchasing Managers Index (PMI) for last month of 47.9 is a significant reduction over January of 50.8 and much lower than December of 51.4. A figure less than 50 indicates contraction and above expansion.

A combination of difficult market conditions in the UK and abroad as well as poor weather have been blamed for the lower than expected performance which could see the UK slip into a triple-dip recession sending the pound lower against the dollar.

For annuities it places greater pressure on equities if the economic prospect indicates lower earnings for companies which would lower pension fund values and the income from annuities.

Highest annuity income could fall
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Annuities benefited from higher equity markets

Most people remain invested right up to the point they purchase their retirement annuities and they have benefited from the rise in the equity markets during this year.

Since November last year the FTSE-100 index has increased 596 or 10.3% from 5,783 to 6,379. Over this period of time annuity rates have reduced and as an example a person aged 65 with £100,000 could buy annuity on a single life, level basis for 5,605 pa and this has reduced to 5,485 pa. Taking into account the fund increasing to £110,000 this person could receive an income of £6,033 pa with the larger fund or an increase of £428 pa even as annuity rates are lower.

For a male the Office of National Statistics (ONS) would expect him to live for a further 17.8 year so this is a gain of £7,618 over his lifetime and a female would live for 20.4 year or an extra £8,731 over her lifetime.

Service sector date for important for pension annuities

For the manufacturing data a strong performance is required in March otherwise this will impact on economic growth. More important for buying a pension annuity are the service sector data. The service sector represents 90% of UK output and these figures out in a few days time need to be good or the Bank of England may consider £25 billion of Quantitative Easing (QE) in their next meeting next week.

This is important as QE increases the price of gilts and reduces the yields. Annuity rates are based on the 15-year gilt yields so a decrease in yields will reduce annuity income. Yields have reduced today by 9 basis points following a series of falls due to the Federal Reserve questioning their stimulus programme QE3 and the Italian election deadlock.

People retiring and buying annuities should consider converting their fund to cash to avoid a sudden fall in the equity markets. If they do not have the time to wait for a recovery it would mean accepting a lower annuity income payable for their lifetime.

News related stories:
UK annuity income higher as service sector and markets improve
UK annuity income higher as manufacturing sector expands
Pension annuity income outlook good as service sector grows
Buying annuity income boost from UK manufacturing data
Pension annuity income could be hit by triple dip recession
Related internet links:
BBC - UK manufacturing suffers shock contraction
Telegraph - UK manufacturing shrinks unexpectedly
Guardian - Poor UK manufacturing adds to triple-dip recession fears
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