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3 September 2012 last updated
Annuity income future uncertain with mixed economic data results

Annuity income could improve as UK manufacturing shows signs of recovery but Europe and China are still struggling.

There has been an unexpected improvement in the UK purchasing managers index (PMI) for manufacturing that increased from 45.2 in July to 49.5 in August. If the index is less than 50 the sector is said to be shrinking and above is growing.

To counter this positive news the Eurozone manufacturing PMI figures were only slightly better rising from a low of 44.0 in July to 45.1 in August and even China registered a figure of 49.2 for the first time since November 2011.

An improving UK economy would mean the prospect of higher interest rates and equities in the future and as most pensioners remain invested until they take their pension annuity this would help to increase their pension fund in time. Higher interest rates would result in higher gilt yields and ultimately annuity income.

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Annuities remain low with economic contraction

The improvement in the UK manufacturing is still under 50 so contracting and the recent improvement in August is not strong enough to drive continued growth. The UK is also dependant on the Eurozone for exports and the fact that European manufacturing is contracting for all 17 countries in the euro, apart from Ireland with a PMI of 50.9, means it will be difficult for the UK to maintain any improvement.

This will mean that annuity rates are likely to remain low for the medium term although there may be some short term increases as news from the Eurozone calms investors resulting in short term movements of funds away from the safe haven of UK government bonds and gilts. As annuity rates are based on the 15-year gilt yields an increase in yields will also increase annuity rates. For example, if yields increase by 10 basis points this will mean providers can increase annuities by 1.0%. The 15-year gilt yields reached an all time low of 2.02% on 2 August and are currently at 2.08%.

China is also experiencing a slowdown with it's annual growth reducing to 7.6% which is the slowest rate for three years in addition to the manufacturing PMI being 49.2 due to a slowdown in international and domestic demand. To counter this the Chinese government has reduced interest rates and relaxed the amount of reserves banks need to keep to try to encourage more borrowing in the country.

Until the larger global economic factors are heading for growth gilt yields are likely to remain below 3% for several years so annuity income for pensioners will remain at historic lows for some time yet.

Increase annuity income from a pension fund

Even though annuity rates are low it is possible to increase the initial income from a pension fund by up to 30% even if a pensioner is in good health by using an investment backed or with profits annuity.

The income can go down as well as up over time so the individual would need to accept a slightly higher risk and should have other sources of income such as pension plans or a final salary pension. The income would be smoothed over time to reduce the impact of equity volatility.

If the individual is in poor health such as diabetes, heart conditions or cancer they could receive 40% higher incomes than the highest standard annuity by using an impaired annuity. For less serious lifestyle medical conditions such as high blood pressure, Cholesterol, smoking or being overweight up to 18% more income than the conventional annuity can be generated from an enhanced annuity.

News related stories:
Current annuity rates helped to higher levels with rising inflation
Annuities threatened as UK economy shrank by more than expected
Impaired annuity rates increase despite UK double dip recession
Related internet links:
Guardian - UK manufacturing shows signs of summer recovery
BBC - UK factory index sees surprise jump
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