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07 May 2013 last updated
Annuity rates to increase 2% as gilt yields rebound on US jobs data

After the better than expected US jobs data showed 165,000 news jobs were added the 15-year gilt yields have rebounded 19 basis point with the prospect of a 2% increase in annuity rates on top of the 1.6% increase in UK equity markets to boost income.

People retiring and taking their benefits can expect up to 2% increase in annuity rates, in particular from impaired annuity providers as gilt yields increase by 19 basis points.

Annuities are mainly based on the 15-year gilt yields and as a general rule a 19 basis point rise will mean a 1.9% increase in annuity rates. Standard annuity providers may be slow to make any improvements after rises last month.

The impaired health providers reduced their rates last month and this will give them extra margin to improve their rates as yields are at 2.34% and safely above the all time low of 2.02% reached in August last year.

Annuity rates increase 2% with US jobs data
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Annuity income double benefit for people retiring

The gain in equities has also increased the pension funds for those that remain invested before they purchase their pension annuity by 1.6% for funds that tracks the FTSE-100 index. If providers increase annuity rates by 1.9% and as well people retiring will receive a double benefit which could increase their annuity income by 3.5%.

For example, a person aged 65 with a fund of £100,000 could buy an annuity on a single life, level basis for an income of £5,625 pa. The rise in equities would increase the fund to £101,600 and if annuity rates rise by 1.9% the income would now be £5,822 pa or an increase of £197 pa at retirement.

Over a lifetime this would be significant as according to the Office of National Statistics (ONS) the life expectancy for a male is 17.8 years and this would result in £3,506 pa more income. For a female the ONS expects her to live for 20.4 years giving an extra £4,018 of income over her lifetime.

165,000 more US jobs boost to investor confidence

After disappointing job figures in April with only 88,000 jobs added and gilt yields falling 11 basis points threatening a 4% decrease in annuity rates, this month has surprised investors with above expected 165,000 jobs created.

The Dow Jones index has closed at 15,056 for the first time in it's history after adding 2.4% or 361 points in the last three days and the FTSE-100 is 1.6% or 106 points higher over three days at 6,557.

In addition the February and March figures were revised up with a gain of 332,000 and 138,000 jobs and currently US unemployment has reduced to 7.5%, the lowest point since December 2008. As a result investors confidence has increased and funds have been moved away from safe havens such as UK government bonds and gilts to other investments offering higher returns.

Despite the positive results in the US the eurozone remains weak and recession is likely to deepen with the expectation for Gross Domestic Product (GDP) to shrink by 0.4% in 2013. The worst is Cyprus with contraction of 8.7% with other countries such as France, Spain, Italy and the Netherlands expected to shrink and only Germany to grow slightly by 0.4%.

This is the limiting factor for gilt yields as investors are boosted by the US and deflated by the eurozone with yields stuck between 2.1% and 2.8%. UK annuity rates many be trapped at current levels until Europe can find a way to out of recession and look forward to growth and improvement employment.

News related stories:
UK annuity income gains with FTSE-100 index 2% higher
Annuity rates higher by 1.5% as Legal & General lead extends
Latest annuity rates may fall 4% as gilt yields collapse after US jobs data
Impaired annuities reduce 1.5% from leading providers on poor yields
Retirement annuity income up as FTSE-100 index reaches a new high
Buying annuities made safer as 15-year gilt yields recover
Related internet links:
Guardian - US unemployment hits lowest rate in four years
BBC - US stocks surge on strong job creation
Guardian - Dow Jones sets new high closing above 15,000
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