7 June 2012 last updated

Annuities income gain for pensioners as equity markets rise

Rise in the equity market will benefit pensioners retiring with funds in equities and the extra growth can purchase a higher annuities income at retirement. The FTSE-100 index has increased 188 points or 3.5% in the last two days from 5,260 to 5,448. Having reduced from 5,812 at the beginning of May a decrease of almost 10% due to the unfolding Eurozone debt crisis. The increase is good news for pensioners that still have their pension invested in equities before they purchase an annuity. Until this week many pensioners were looking at a large reduction of both annuity rates and equities falling which in some cases has reduced the income from their pension fund by 15% in the last month. Gilt yields have also increased for the second day in a row with the 15-year gilt yields up 9 basis points at 2.28%, a 22 basis point improvement since reaching an all time low of 2.06% on 5th June 2012.

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Providers increasing annuity rates

There are signs that providers are taking advantage of the improvements with Partnership Assurance and Just retirement increasing their impaired annuity rates by about 1% whereas other providers such as Liverpool Victoria are decreasing their rates at midnight tonight. For the latest updates see Annuity Rates Review.

An impaired annuity could pay 40% higher incomes than the highest conventional annuity for medical conditions such as diabetes, heart conditions or cancer. For less serious lifestyle conditions such as high blood pressure, Cholesterol, smoking or being overweight pensioners can buy an enhanced annuity that will offer more income.

For pensioners in good health a with profits annuity or investment backed annuity could offer 30% higher initial incomes than the conventional open market option. This may be suitable for pensioners with more than one personal pension fund or final salary pension to spread the risk with different sources of income. The with profits annuity smoothes the income over time significantly reducing the volatility experienced by equity funds and also offer a guaranteed minimum pension with the opportunity to purchase a conventional annuity at any time.

Markets more confident about economies

Equities have recovered with greater optimism about the prospect of EU leaders being able to resolve Spain's banking issues. There has also been positive news from the Bank of England as interest rates will remain at 0.5% although this does not help pensioners with their savings.

However, the Bank of England are also leaving Quantitative Easing at current levels of £325bn and this may also have helped gilt yields to improve as investors more their funds away from UK government bonds. These funds may be heading for Spanish 10-year bonds where Spain have had a successful auction raising 2bn euros although at the high yield of 6.04%, which is higher than the last auction which cost only 5.74 %.

In contrast to the recent UK manufacturing data where the figure of 45.9 was the lowest level reached for three years, the service sector shows the purchasing managers' index (PMI) has remained unchanged at 53.3 points. Any figure over 50 indicates growth and this news will have helped equity markets after a very poor May and the combination of rising equities and gilt yields will help pensioners when they purchase annuities income at retirement.