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22 November 2013 last updated
Best annuities to benefit if US Federal Reserve tapers stimulus

Best annuities in the UK could benefit as latest minutes from the US Federal Reserve indicate policymakers intend to taper the $85 billion stimulus package in the next few months sending resulting in higher gilt yields.

Annuity rates are primarily based on the 15-year gilt yields to pay income and these have increased by 10 basis points to 3.26% after the minutes of the Federal Reserve were published indicating the policymakers were intended to reduced the stimulus package.

Over the summer annuity rates increased strongly as the Fed set out their plan for tapering only to confuse the market by delaying after equity and bonds fell sending yields for borrowing and mortgages higher.

Recently the best annuities have reduced as yields fell back as investors anticipated the Fed would do nothing until next summer. The US Fed has kept everyone in the dark about the timing of the tapering and it is likely that pension annuity rates will remain volatile until clearer direction is given.

Best annuities to rise on Fed tapering
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Annuities could increase up to 1.5% in short term

Although it is possible for annuity rates to increase by up to 1.5% in the short term given the recent improvements in gilt yields, providers may hold back to see how the market develops including US Federal Reserve action before making any changes.

For a person aged 65 with a fund of £100,000 buying a single life, level annuity the current income is £6,132 pa and a 1.5% increase would add £92 pa to £6,224 pa. In terms of lifetime income, the Office of National Statistics (ONS) would expect a male to live for 17.3 years and he will have £1,591 more over his lifetime. For a female she can expected to live for 20.4 years increasing her income by £1,876.

It is likely that the standard annuity providers will do nothing significant although the providers of impaired annuity rates will make improvements of about 1.0%. These providers are more sensitive to changes in gilt yields and make incremental changes from week to week. They also adjust the level of enhancements given foe medical conditions depending on their perceived risk and need to generate new business. This can mean some medical conditions see improved rates and some lower rates, even with improving gilt yields.

For medical condition such as high blood pressure, Cholesterol, smokers or people overweight an enhanced annuity could offer up to 18% more income than a standard annuity. For more serious medical conditions such as diabetes, heart or cancer conditions income increases of up to 40% over a standard annuity are possible as life expectancy is lower and so more income can be provided.

Fed minutes point to tapering in next few months

According to the minutes of the October meeting the Fed expects economic and labor market reports to warrant tapering the pace of bond buying suggesting some action could be taken to reduce the $85 billion Quantitative Easing measures.

The tapering was planned to start in September but was delayed after disappointing economic data at the time and the expected US debt ceiling negotiations. The debt ceiling issue is to be revisited in January leaving the Fed in a difficult position if they are going to take some limited action to demonstrate longer term intent. This has been suggested in December otherwise the Fed may have to wait until February or March 2014.

The Fed want to take action before any bubbles occur in markets such as equities which have already seen new highs with the Dow Jones reaching 16,064, an all time record.

Currently interest rates are not expected to increase until unemployment reaches 6.5% and the minutes suggest this level could be reduced to 6.0% to allow more time for stimulus to take effect while providing a timetable to eventually end the programme.

The expectation is for yields to remain high from now to the next employment report on 6 December as these latest figures could be strong. People retiring should secure the highest annuity rates up to this time as there may be a dip after this date if the data is weak and the market would see stimulus continuing with lower yields and therefore annuities.

News related stories:
UK annuities could rise as market expects Fed to taper stimulus
UK annuity rates under pressure as yields fall after poor US jobs data
Pension annuities to recover as US debt ceiling deal is agreed
UK annuity threat as yields fall with looming US debt ceiling
Annuity Rates stabilise as US Fed delays tapering stimulus
Related internet links:
USA Today - Fed minutes point to tapering in next few months
Telegraph - US Fed likely to start QE taper in coming months
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