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2 January 2013 last updated
Pension annuity income and equities rise after fiscal cliff deal reached

Equity markets around the world surged higher as the US agree a deal on the fiscal cliff with UK pensioners benefiting from larger funds and higher pension annuity income.

The US was on the verge of implementing the fiscal cliff that would mean $600 billion of spending cuts and tax rises costing citizens an additional $2,000 a year in tax.

The eleventh hour agreement avoids the worst case scenario that would have seen the US return to recession with a knock on effect for the rest of the world economy. Equity markets around the would increased with the FTSE-100 index up 130 points or 2.2% at 6,027 and on Wall Street the dow Jones up 308 points at 13,412.

For UK pensioners about to retire it means their pension fund value will have increased by about 2% and this will add directly to the pension annuity income they can receive at retirement and payable for their lifetime.

Equities higher with fiscal cliff deal
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Income from annuities increase after deal

The vast majority of pensioners retiring will remain invested in equities right up to the point they purchase their pension annuities. This represents a risk as markets can fall quickly and if this does happen most people cannot wait for a recovery as they need the income from the annuity.

Fortunately on this occasion UK pensioners have benefited from the gain with the FTSE-100 index up 2.2%, Dow Jones index up 1.7% and even Europe higher with the German Dax up 2.1%, Spanish Obex up 3.4% and Italy FTSE MIB up 3.8%.

and for a 65 year old male with a fund of £100,000 before the gains he could purchase an income on a single life, level basis at
current annuity rates for £5425 pa. After the increase their fund could be £102,000 and the annuity increases by £108 pa to £5,533 pa and according to the Office of National Statistics (ONS) he is expected to live another 17.6 years. Over his lifetime he can expect to receive another £1,900.

For a woman aged 60 on the same pension annuity basis she could purchase an income before the increase of £4,877 pa and after this increases by £97 pa to £4,974 pa. The ONS expects her to live another 24.4 years and over her lifetime this would add another £2,366. Taking into account gender neutral pricing and the new Unisex annuity rates over the last month the improvement is even greater.

Since 30 November 2012 equities and annuities are 2.7% higher so the income has increased from £4,749 pa to £5,010 pa or by £261 pa. Females aged 60 and buying their annuity now rather than November will receive an extra £6,368 over their lifetime simply by waiting one extra month.

Risks from the deal remain for pensioners

The fiscal cliff deal has not been completely resolved but delayed as the US debt ceiling of $16.4 trillion has now been reached. The deal will allow a tax increase called the payroll levy paid by both employees and employers and economists expect this to reduce US growth to 1% in the first quarter compared to 3% in the third quarter of 2012. There will also be $100 billion of government spending cuts due after two months with the uncertainty of how this will affect the corporate sector.

For pensioners the first quarter may be a good time to purchase an annuity as markets are confident increasing pension fund values and gilt yields are also rising as investors move away from save havens such as UK government gilts. Pension annuity rates are based on the 15-year gilt yields so a 10 basis point increase in yields would translate to a 1% increase in annuities. Later in the year the US debt problem will return and we could see equities and yields decrease again which would reduce the annuity income for pensions at retirement.

News related stories:
Annuities income reduce as equities fall with fical cliff deadlock
UK annuity income from pension funds boosted by fiscal cliff offer
Pension annuity income and markets lower with US fiscal cliff
Pension annuity income and equities rise after fiscal cliff deal
Related internet links:
Telegraph - Fiscal cliff deal pushes markets higher
BBC - Obama praises US fiscal cliff deal
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