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2 April 2012 last updated
Pension annuity income boosted by equities gain

Strong UK manufacturing results have boosted equities with pension fund values and pensioners benefiting with higher income from annuities.

UK equities were strong today with the FTSE-100 rising 106 points to close at 5,875 based on good economic news for UK manufacturing sector. A strong economy could also benefit annuity rates if more investors switch funds from gilts to equities pushing prices of gilts down and the yields up.

This improvement is positive news for pensioners retiring where their funds remain in equities as annuity rates are based on fund sizes so the larger the fund the higher the annuity and income received.

May people retiring never convert their funds to cash before purchasing annuities leaving them open to a sudden drop in the fund value while the transfer is in progress. This often results in a lower income as the annuity is based on the actual funds received.

Economy boost for pension annuity
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Economic growth gain for pensioner income

As long as the funds received are within 10% of the original quote and within the annuity quote guaranteed period the providers will honour the rate applied. If equities increase pensioners can find themselves with more income than expected although there is always the risk of a loss by not converting to cash before the transfer.

The purchasing managers’ index (PMI) for manufacturing increased from 51.5 in February to 52.1 in March and any figure over 50 indicates growth. This supports the prediction from the Office for Budget Responsibility (OBR) that predicted the UK economy to growth by 0.8% this year in contrast to the Organisation for Economic Co-operation and Development (OECD) that predicts output declining by 0.4%.

Growth would be positive news for people retiring as investors would be more committed to equities rather than UK government bonds and gilts. As annuity rates are based mainly on the 15-year gilt yields as investors move from the safety of gilts to equities the price of gilts falls and yields increase. This would mean a double gain for pensioners invested in equities with rising markets and annuities.

Eurozone economy facing another recession

In contrast the Eurozone is facing a double dip recession with unemployment at 10.8% or 17 million the highest level since 1997 and also a reduction in orders and exports for the largest economies France and Germany. The PMI manufacturing index for Europe was under 50 for the 8 month in a row and the downturn would mean that the UK could be at risk of stalling growth later in the year.

The 15-year gilt yields increased today up 3 basis points to 2.75% although there was no change in standard annuity rates. Some impaired annuity providers such as Partnership have seen changes in their rates with some increasing for certain medical conditions and others decreasing as underwriters adjust their rates.

News related stories:
Annuities threatened as UK economy shrank by more than expected
Annuity income future uncertain with mixed economic data results
Related internet links:
Guardian - Eurozone fears drag down markets
BBC - UK manufacturing growth at 10-month high
Guardian - Recession fears with jobs and industry data
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