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5 September 2018 last updated

Pension annuities fall as US tariffs creates economic uncertainty

Pension annuity rates are down by an average -1.27% during the month as tension remains high over economic impact of US tariffs on Turkey and action to be taken by China.

The 15-year gilt yields increased to 1.63% before falling back 12 basis points to a low of 1.51% with heightened tension over the impact of US tariffs on $200 billion of Chinese exports.

The US increased tariffs on Turkish steel imports to 50% and aluminum to 20% sending the currency lower by another 20% against the dollar and is now 50% down over the year.

In Turkey inflation has reached almost 16% and the deepening economic crisis has sent invertors to the safety of bonds and gilts.

More worrying is the risk of contagion as there is growing concern in the European Central Bank (ECB) of the significant exposure European banks have to Turkish businesses.

Providers reduced annuity rates in anticipation of further uncertainty and lower gilt yields.

Pension annuities fall with US tariffs
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Annuity rates drifting lower

Since the start of the year annuity rates have been strong with the longer term expectation of ECB indicating the end of the asset purchase programme expected now in the summer of 2019.

Gilt yields and annuity rates
Fig 1: Chart comparing standard annuity rates and 15-year gilt yields

The above chart compares the change in annuity rates and 15-year gilt yields since January 2018. Even though gilt yields are lower by -1.80% since the start of the year providers have maintained rates in positive territory.

Standard pension annuities are lower by -1.10% during the month and smoker & enhanced rates are lower by a greater amount of -1.42%.

For our benchmark example for smoker & enhanced rates, a 65 year old with a £100,000 fund the largest fall was for those buying an annuity with 3% escalation on a single life basis can expect income to reduce by -5.41%. This has reduced by -£235 pa from £4,578 pa to £4,343 pa over the month.

Over the month this -£235 pa fall will impact lifetime income. The Office of National Statistics (ONS) would expect a male to live for 18.5 years and he will have -£4,347 less over his lifetime. For a female she can expected to live for 20.9 years decreasing her lifetime income by -£4,911.

There could be further uncertainty in the the short term as US tariffs against China take effect resulting in a deteriorating economy. Already the equity market in China is -31% down from the peak and the ripple effect of higher cost of goods could see more volatile equity markets. Investors seeking the safety of bonds and gilts would see yields fall along with pension annuities.

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