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17 October 2013 last updated
Pension annuities could recover as US debt ceiling deal is agreed

The US Congress has passed a bill to raise the debt ceiling giving investors confidence and raising gilt yields to 3.23% up 16 basis points in the last week which will allow providers room to increase pension annuities.

With the borrowing reaching the $16.7 trillion limit in May and a series of "extraordinary measures" ending on 17 october Congress have managed to agree a deal that will fund the government until 15 January and extend the Federal borrowing until 7 February 2014.

This gives the market breathing room to invest elsewhere other than bonds and gilts increasing yields to the benefit of UK people retiring and buying annuities if yields continue to increase.

Annuity rates are based primarily on the 15-year gilt yields and a 16 basis point rise will see a 1.6% increase. Impaired annuity rates are likely to improve within a week if yields continue to rise as these providers are very sensitive to any changes.

Providers of standard rates may wait until next month before considering an increase.

Pension annuities recover as US debt ceiling resolved
  Gilt yields have been rising as US debt ceiling deal is agreed should see annuity rates rise
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Take advantage of any rates increases this year

People retiring and taking their benefits should take advantage of any rise in pension annuity rates this year as the US debt ceiling problem will return in 2014. Annuities have decreased across the board as a result of the crisis and delay of tapering of the stimulus package after investors moved funds to safe havens such as US Treasury notes and UK government bonds and gilts.

The 15-year gilt yields reduced from a high this year of 3.38% to 3.07% over about three weeks. Our benchmark example has reduced from an income of £6,159 pa to £6,019 pa or a fall of £140 pa.

This fall is significant over a lifetime and the Office of National Statistics (ONS) would expect a male to live for 17.3 years receiving £2,422 less. For a female she can expected to live for 20.4 years and her income will reduce by £2,856.

US Debt and stimulus still a problem

The issue of the debt ceiling has only been delayed and not resolved as this is a battle between the US Government and Republican run House of Representatives over the Patient Protection and Affordable Care Act or "Obamacare" as it is also known.

The Republicans want the scheme delayed or preferable repealed and it is their control over the House of Representatives that they are using to leverage the government on this point. It will be in the new year that they both return to the subject of extending the debt ceiling and is likely to have an impact on lowering UK annuity rates, at least in the short term.

There is also the issue of the US tapering of the $85 billion stimulus package. The recent appointment of Janet Yellen as the head of the Federal Reserve could mean slower progress on tapering. Any measures to taper will lead to higher gilt yields as investors move money away from this investment as the market is artificially inflated by the stimulus package. Janet Yellen is known to support monetary policy and has supported the stimulus measures which could mean lower than expected annuities in the first quarter of next year.

For people buying their annuity may find doing so before the end of this year could receive a better income from their pension than leaving it to the new year.

News related stories:
UK annuity threat as yields fall with looming US debt ceiling
Annuity Rates stabilise as US Fed delays tapering stimulus
Retirement annuities threat as yields fall on UK and US stimulus plans
Related internet links:
BBC - US debt ceiling bill drafted by Congress
Guardian - Congress passes bill to raise US debt ceiling
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