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11 March 2013 last updated
Retirement annuity income up as FTSE-100 index reaches a new high

The FTSE-100 index closed at 6,504 following the Dow Jones last week reaching an all time high after the US economy added more jobs and people that remain invested before retiring will gain with a higher retirement annuity income.

Equity markets around the would remain strong with the Dow Jones index reaching 14,447 up 50 points continuing on from the positive news that the US economy added 236,000 new jobs and has done so now for the past 29 months.

The majority of people retiring remain invested up to the point they buy their pension annuity. If the fund tracks the FTSE-100 index the recent rises will be reflected with an increase in value which means their retirement annuity income will also be higher.

Indices in the US and UK are reaching five year highs and this has countered the significant falls in gilt yields in the last couple of years that has seen annuity rates collapse to their lowest levels.

Retirement annuity income up with FTSE-100 index
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Fund values up 31% helps annuity income higher

In June 2011 the FTSE-100 index reached a recent low of 4,944 and has since increased 1,560 points or 31.5%. For people retiring and remaining invested by tracking the index before making an annuity purchase the gain will directly improve their annuity income.

For example a 65 year old male retiring in October 2011 with a fund of £100,000 could have received a of £6,093 pa on a single life, level basis. Annuity income has reduced by £608 pa or 9.9% over this time, however, the pension fund could have improved to £131,500 which would provide an retirement annuity income of £7,212 pa.

This means that the income from their fund would have actually increased by £1,119 pa or 18.3% over this period. Over the individuals lifetime the Office of National Statistics (ONS) would expect a male to live for 17.8 years and this would result in £19,918 more income.

For a female she would have received an annuities income of £5,712 pa in October 2011 and this would have increased to £7,212 pa due to the introduction of Unisex annuity rates that benefited females as well as the increase in pension fund value. The gain for females would be £1,500 pa or 26.2% higher and according to the ONS they are expected to live for 20.4 years providing an extra £30,600 of income over their lifetime.

Equity grow in conflict with sluggish economies

The risk for retirement annuities is a combination of the current low annuity rates coupled with falling equities that will reduced the value of pension funds. People retiring now should consider transferring their funds to cash and secure the gains so far to avoid any sudden fall in the equity markets just before buying annuities. In most cases people cannot afford to wait for a recovery and once a standard or impaired annuity is purchased it cannot be changed.

The global economies remain weak and appear to be responding only to stimulus programmes from the US, UK and Japan. There is also the promise from the European Central Bank (ECB) to do "whatever it takes" to protect the sovereign debt of member states thereby satisfying investor confidence and lowering yields to sustainable levels.

These measures have released the threats to investors perception in the short term allowing growth in stockmarkets, however, if this is not translated into actual economic growth fear may return and funds return to safe havens such as US Treasury notes, UK government bonds and gilts and German Bunds. This would increase the price of gilts and lower the yield and as UK annuity rates are based on the 15-year gilt yields, rates would fall.

This scenario may occur as the US has a critical deadline on 19 May where the Democrats and Republicans need to agree the debt ceiling once again to allow the US government to continue operating. This uncertainty with eurozone debt issues likely to continue in the second and third quarters and people retiring should take advantage of a relative positive moment to buy their retirement annuity income.

News related stories:
Retirement annuities income increases with US equity market gains
UK annuity income boost as FTSE index reaches five year high
Pension annuities benefit as FTSE index at pre-financial crisis high
Pension annuity income and equities rise after fiscal cliff deal reached
Related internet links:
Telegraph - FTSE-100 climbs above 6,500
Telegraph - Global economy belies stockmarket boom
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