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21 February 2013 last updated
Best annuity income and markets fall 1.6% after US Fed stimulus fears

The best annuity income for people retiring and remaining invested up to the point of buying annuities has been reduced as global equity markets fall after the US Federal reserve commented that the stimulus measures were increasing risks.

Recent gains in annuities have been quickly offset by the fall in equities with the Dow Jones decreasing over the last two days by 155 points to end at 13,881 and the FTSE-100 falls 1.6% or 104 to end at 6,292.

The falls in equities was due to the US Federal Reserve comments about the $85bn per month Quantitative Easing or QE3 stimulus was increasing the risks of future economic and financial imbalances suggesting they intended to reduce the measures.

Most people retiring remain invested before buying annuities and although annuity rates have increased the volatile market reaction means any gain has been reduced as the fund is smaller.

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Annuity income lower for many pensioners

For those retiring that remain invested any change in equity markets will impact the best annuity income for their lifetime. As an example, a person aged 70 with a fund of £75,000 could purchase an annuity for £4,796 pa on a single life, level basis. If the underlying investments track the FTSE-100 index the fund would have reduced to £73,800 and the income from the pension annuity would be £77 pa lower at £4,719 pa.

Based on the Office of National Statistics (ONS) a male aged 70 will live for 14.1 years and the £77 pa decrease will mean his lifetime income reduced by £1,085. For females their life expectancy of 16.4 years generating £1,262.

Not all UK annuities will be lower as Legal & General have increased their standard annuity rates by 1.5% and larger fund sizes of £100,000 or more will have this gain offset by the fall in equities. Also, anyone that has switched their equities to a cash fund will also avoid the recent decreases in the market.

Equity rally at risk of faltering

The equity markets began their rally this year with the FTSE-100 index starting at 5,897 and closing at a high of 6,395 this month. The Dow Jones index started at 13,104 and closed at a high of 14,036 with the main catalyst being the US fiscal cliff deal that would have resulted from Jaunary in $600 billion of spending cuts and tax rises costing citizens an additional $2,000 a year in tax.

There are other spending cut issues to resolve to help reduce the $16.4 trillion US debt ceiling with $85 billion of government spending cuts due in March with the uncertainty of how this will affect the markets.

To date the Federal Reserve has injected $3.078 trillion through QE3 and the current $85 billion per month until there are significant improvements in the US jobs market. Some of the committee members overseeing the bond buying measures were concerned that further QE3 could increased inflation and undermine financial stability sending markets lower as investors fear the consequences of reduced liquidity.

For people retiring now with good increases in the value of their pension fund, they should consider transferring to cash to protect the gains before buying UK annuities.

News related stories:
Retirement annuity income kept high with Federal Reserve stimulus
Pension annuity income rises after Federal Reserve stimulus
Buying pension annuities now made safer with US congress vote
Pension annuity income and equities rise after fiscal cliff deal
Annuities income reduce as equities fall with fiscal cliff deadlock
Related internet links:
Guardian - US uncertainty over QE3 threatens markets
Telegraph - Stock markets tumble on Fed fears
BBC - Stock markets fall after US Fed comments
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