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1 November 2012 last updated
Pension annuity income may struggle to increase as UK manufacturing slows

Pensioners retiring may find their fund struggles to grow limiting the income they can buy from pension annuities as UK manufacturing slows which could impact on equity markets over the next quarter.

In the UK the Purchasing Managers' Index (PMI) has reduced from 48.1 in September to 47.5 in October. A figure below 50 indicates a contraction in manufacturing. The PMI index had increased in August to 49.5 suggesting a possible recovery in the economy.

A stagnating economy will result in equity markets being unable to rise higher than current levels as improving company earnings rely growth. This creates a risk for pensioners retiring with their funds invested in equities as negative news can quickly reduce markets.

The value of pension funds and the income from an annuity would be lower with little prospect for most pensioners recovering the situation unless they can defer purchasing their annuities.

Pension funds struggle with UK manufacturing
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Markets higher despite poor UK economic results

Equity markets were higher even though UK manufacturing is contracting with the FTSE-100 index up 79 points at 5,862 and the Dow Jones index up 136 points at 12,232. In the US consumer confidence has increased with the Conference Board's Consumer Confidence Index rising from 68.4 to 72.2.

For pensioners retiring now the gain in the FTSE-100 index would mean an increase in their pension annuity income. For example, a male aged 60 with a fund of £100,000 for purchase an annuity income of £5,070 pa and with the improvement in equities this would increase to £5,138 pa. Once an annuity is purchased it cannot decrease so over the annuitant's lifetime the Office of National Statistics (ONS) would expect him to live for another 21.5 years producing another £1,462 of income.

Impaired annuity rates lower

Impaired annuity providers continue to reduce their rates with Partnership lower by approximately 1% even though gilt yields have increased in the last three days by 8 basis points from 2.25% to 2.33%. As a general rule an 8 basis point increase in gilt yields would result in a 0.8% increase in annuity rates, however, the providers are pricing in anticipation of the unisex rates being introduced in December 2012 and this has seen annuities reduce in value.

Even though the providers are reducing impaired rates, these can still provide up to 40% greater income than a conventional annuity if the individual has medical conditions such as diabetes, heart conditions or cancer. For less serious lifestyle conditions such as high blood pressure, Cholesterol, are a smoker or are overweight incomes of up to 18% more than the open market option could be paid by an enhanced annuity.

Even if the pensioner is in good health initial income of up to 30% can be paid with an investment backed or with profits annuity although there would be a slightly higher risk as the income could go down as well as up. For those that have other personal pensions or a final salary scheme and want the maximum possible income now a with profits annuity could achieve this and the income would be smoothed over time and less volatile than equity markets.

News related stories:
Pension annuity income could be hit by Triple dip recession
Annuity income at retirement down with weakening global economies
Annuity income future uncertain with mixed economic data results
Related internet links:
Unisex annuity rates to reduce annuities for males and couples
Guardian - UK manufacturing slowdown
BBC - manufacturing continues to contract
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