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5 June 2013 last updated
Buying annuity income made safer with better UK economic data

For people buying annuity incomes the process is now safer with the latest service sector data showing significant increases in expansion with a figure of 54.9 as manufacturing delivered 51.3 indicating an improving economy.

The purchasing manager index (PMI) for manufacturing increased to 51.3 from 50.2 and for the
service sector this has improved to 54.9 up from 52.4 where a figure over 50 indicates expansion and below contraction. The service sector represents about 90% of the UK economy.

For annuities a stronger economy will deter the Bank of England from considering Quantitative Easing where money is printed to buy government gilts increasing the price and decreasing yields.

As annuity rates are mainly based on the 15-year gilt yields a fall in yields would mean lower UK annuities but as investors perceive economic improvements yields have been increasing to the benefit of people retiring.

Buying annuity income safer with UK economic data
  The UK service sector continues to grow making it less likely investors need to move funds to gilts
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Equity market fall counters gain from gilt yields

Gilt yields have been strong in the last three weeks with the 15-year gilt yields increasing 44 basis points from a low of 2.15% to 2.59% today. As annuity rates are primarily based on yields this increase would means a 4.4% rise in rates which the providers may not apply immediately as the market is volatile.

Investors are uncertain if the US Federal Reserve will cut their stimulus measures which are currently $85 billion per month in the form of Quantitave Easing. The Fed have said they will continue until US unemployment reduces before lowering the level of stimulus and the recent increases in US jobs suggests the time is aproaching. The next Federal Reserve polcy meeting is on the 19 June and investors have been moving funds away from equities in anticipation of a decision.

The FTSE-100 index is 421 points or 6.1% lower than the recent 6,840 high closing at 6,419 although the Dow Jones index is lower by only 2.7% at 14,989. The Japan Nikkei index has suffered worst with significant decreases to a six week low. The stimulus activity of global central banks has been funding the rise in equities and this uncertainty is a risk for people that remain invested before buying their UK pension annuity.

Where people have pension funds that track the FTSE-100 index over the past two weeks the expected income for a 65 year with a fund of £100,000 on a single life, level basis has reduced by £345 pa from £5,671 pa to £5,325 pa. Based on the Office of National Statistics (ONS) a male aged 65 will live for 17.3 years and the decrease will mean his lifetime income reduced by £6,072. For females their life expectancy of 20.4 years generating £7,038.

Gilt yields strong despite market volatility

Yields have remained high even though equities have reduced suggesting funds have not returned to gilts which would increase the price and reduce yields. At some point the $600 billion of funds that moved from equities to bonds and gilts at the beginning of the financial crisis will flow back in what is termed the great rotation.

The recent rise in yields around the world and the resistance of yields to fall with equities is unusual indicating the process may have started. However, gilt yields are volatile at the moment and have been at this level before returning to all time lows.

People retiring now are in a strong position and have gained with rising equities with improved annuity rates although there remains growth issues with the US as their spending cuts could undermine their economy in the second half of the year.

News related stories:
Annuities income boost as FTSE index and service sector improve
Best annuity income prospects improve with strong service sector data
UK annuity income higher as service sector and markets improve
Highest annuity income could fall with poor data for manufacturing
Pension annuity income outlook good as service sector grows
UK annuity income higher as manufacturing sector expands
Related internet links:
BBC - UK service sector in fast growth
Guardian - Manufacturing grows at fastest rate
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