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14 November 2013 last updated
Impaired annuity rates up 1.5% from Just Retirement with higher yields

Impaired annuity provider Just Retirement is leading the market with higher rates up 1.5% following improvements in gilt yields after a series of positive economic data from the US and UK although there are risks posed from US Fed.

Impaired annuity rates are particularly sensitive to changes in the 15-year gilt yields which have improved by 22 basis points in just over a week.

As a general rule a 22 basis point increase in yields would result in a 2.2% increase in annuity rates at some point from providers.

Apart from Just Retirement there have been better rates from Partnership and Liverpool Victoria as the improving situation allows them to improve margins.

There has been a series of positive economic data including higher US jobs figures and growth with improved data in the UK also suggesting interest rates may rise. This has focused investors on the possibility that the Federal Reserve may start tapering sooner than expected resulting in a price fall for bonds and gilts and higher yields to benefit annuities.

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Medical conditions can enhance income

If you suffer from lifestyle medical condition such as high blood pressure, Cholesterol, are a smoker or are 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 an impaired annuity could offer income increases of up to 40% over a standard annuity. The reason for this is that life expectancy is lower and so more income can be provided over this shorter period of time.

From our benchmark example, a person aged 65 with a fund of £100,000 could buy a single life, level standard annuity and receive an income of £6,132 pa but could be £1,103 pa higher with lifestyle medical conditions at £7,235 pa. For more serious conditions the income could be £2,452 pa higher at £8,584 pa.

US Fed position on stimulus to continue

Annuities have increased significantly in the second and third quarters this year with higher 15-year gilt yields rising 123 basis points from 2.15% to 3.38% and is currently at 3.19%. The main reason for the rise has been the Federal Reserve intention to reduce the $85 billion stimulus package. Investors still expect tapering to occur sooner rather than later although this may change with the new Fed chairman Janet Yellen.

This Quantitative Easing policy buys bonds and mortgage debt increasing the price and reducing the cost of borrowing. It releases investor fund which can then be used to buy other higher yielding investments elsewhere. This has injected liquidly to equity markets and any suggestion of removing this has resulted in a decrease in both equity and bond markets worldwide.

The intended next Federal Reserve chairman is Janet Yellen to replace Ben Bernanke in January 2014 and she has defended monetary policy seeing this as an important element to US economic growth. She says that Quantitative Easing helps to keep long term interest rates very low and she will pursue this policy as long as unemployment is above the 7.0% level and the intention is to keep the stimulus going well into 2014 although at some stage it will come to an end.

Gilt yields will cap annuity rates rise

A continuation of the $85 billion stimulus package means investors will buy back bonds in anticipation of higher prices during the first half of next year. Gilt yields are likely to drift back down to lower levels in the first quarter of 2014 and annuity rates would also fall.

The equity markets have been positive to the Senate confirmation hearing and response from Janet Yellen with the Dow Jones index rising 55 points to 15,876.

For people retiring in the UK annuity rates have bounced back in the last week to a relatively high level although gilt yields have now slipped back slightly. If Federal Reserve stimulus in the US is expected to continue next year we may see pension annuity rates fall until US unemployment is below 7.0% and Janet Yellen announces tapering of the stimulus. Therefore annuity rates may not recover until the middle of next year and this should be a consideration for those taking their benefits at the moment as there is a cost of delay issue to consider.

News related stories:
UK annuities could rise as market expects Fed to taper stimulus
Annuity rates increase up to 2.8% from Legal & General
Enhanced annuities rise 1.5% after strong gains in gilt yields
Retirement annuities threat as yields fall on UK and US stimulus plans
Related internet links:
Telegraph - Janet Yellen warns US economy short of potential
BBC - Janet Yellen defends Fed policies in Senate hearing
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