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4 January 2013 last updated
Best annuities threat for pensioners after UK service sector output fall

For the first time in two years the service sector has recorded a fall in output and could mean the UK is heading for a triple dip recession which would depress equity markets and reduce the best annuities income from pension funds at retirement.

After the positive manufacturing purchasing manager index (PMI) figures showing growth just a few days ago the service sector recorded a decline with a figure of 48.9 for December. A figure above 50 indicates growth and below contraction.

The service sector represents three-quarters of the UK economic output and the unexpected fall has occurred for the first time for two years. The UK has already been threatened with losing it's AAA credit rating if it slips back into recession.

Pensioner tend to leave their funds in equities before buying the best annuities if confidence in the UK changes it could result in markets falling reducing the value of pension funds.

UK service sector could hit annuities
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Pensioners take risks at retirement

Virtually all pensioners remain invested right up to the point they buy their annuities and this represents a high risk. Markets can fall quickly taking time to recover the losses and many pensioners cannot
afford to wait as they need the income immediately they retire.

Equity markets are currently at a high with the FTSE-100 index closing at 6,090 up 42 points and the Dow Jones at 13,435 up 44 points due to positive news from the US reaching a deal over the fiscal cliff. Markets reached a low point of 4,944 in October 2011 and at the current level is 1,146 points or 23.1% higher today. To protect the gains pensioners should consider locking-in the gains by transferring to lower risk cashed based funds.

Back in October 2011 the best annuity rates were higher than today and a male aged 60 with a fund of £100,000 could have purchased an annuity for £5,567 pa on a single life, level basis. Now the annuity rates has reduced by £690 pa or 12.3% to £4,877 pa, however, equities have increased for any pensioner remaining invested and if their portfolio reflected the FTSE-100 the fund would have increased to £123,100. The annuity provided given the lower rate would be £6,003 pa and the pensioner would be better off by £436 pa.

Annuity rates risk of future decreases

A poor performing service sector may make a triple dip recession more likely if this trend continues as it represents three-quarters of the UK economic output compared manufacturing sector with only 10% that posted growth PMI figures in December. One threat is the Bank of England returning to Quantitative Easing (QE) where the bank buys gilts to increase money supply to the economy.

The best Pension annuities are based on the 15-year gilt yields so QE will increase the price and reduce the yields. This would lead to annuity rates decreasing which would counter the effect of increasing equities. If the economic outlook worsens equity markets are likely to fall and the combination of falling annuities and equities can significantly reduce a pensioners expected income at retirement.

One way add value would be to ensure any medical conditions are taken into account as this could increase the annuity rate by up to 50% in some cases. An impaired annuity would take into account life expectancy which is reduced for conditions such as heart disease, diabetes, cancer, smoking or high blood pressure and Cholesterol.

News related stories:
Buying annuity income boost from UK manufacturing data
Pension annuity income could be hit by Triple dip recession
Related internet links:
Guardian - Service sector contracts
BBC - UK service sector activity falls
Telegraph - Triple-dip threat as service sector shrinks
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