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5 February 2013 last updated
Pension annuity income outlook good as service sector grows

The growing service sector has improved the outlook for pension annuity income as both equity markets and gilt yields increased today improving the prospects for people at retirement.

Following the grow in the manufacturing sector a few days ago, the service sector has also posted growth with Purchasing Managers’ Index (PMI) for services increasing from 48.9 in December to 51.5 in January.

The results are more significant than the manufacturing data as services represents 90% of GDP in the UK. The FTSE-100 index increased by 36 points to 6,282 after a poor day yesterday on fears of the eurozone debt crisis returning and the 15-year gilt yields increased by 3 basis points to end at 2.63%.

Both these factors will help boost income from pension annuities and continue an excellent start of the year after annuity rates were depressed as a result of the EU Gender Directive.

Pension annuity income service sector grows
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Growth in services boosts pension annuity market

The level of equities and gilt yields depends on the confidence of investors and the recent positive news from both the manufacturing and service sectors reinforces investor outlook which has been positive since the US reached a deal over the fiscal cliff. In particular the service sector growth includes an increase in employment and reduces the likelihood of a triple dip recession.

There is also an expectation from investors that bond positions will be recycled to equities reversing the trend over the past seven years where $600 billion flowed out of equities and $800 billion flowed into bonds as investors sought safe havens such as US Treasury notes and UK government gilts.

Annuity rates are primarily based on the 15-year gilt yields so any increase will eventually be reflected in annuities. Yields started the year at 2.31%, have now increased to 2.63% and as a general rule this 32 basis point increase in yields would translate into a 3.2% rise in annuity rates.

Impaired annuity providers such as Just Retirement, Liverpool Victoria and MGM Advantage have increased their rates by up to 6.0%, however, impaired annuities were decreased by a substantial amount with gender neutral pricing in December. Only Legal & General has increased their standard annuity rates this year by 1.0% so there is still room for more increases in the short term of about 2.36%.

Investor confidence is fragile and current gains are based on the general positive expectation that the European Central Bank (ECB) will do "whatever it takes" to support the euro and the US fiscal cliff deal. The risks have not gone away and are likely to return later in the year which would have an impact on pension fund values and annuity rates. People retiring now should convert their gains to cash to protect their fund after a period of gains and expect some further improvements in pension annuity rates in the short term.

News related stories:
Best annuities threat for pensioners after UK service sector output falls
UK annuity income higher as manufacturing sector expands
Buying annuity income boost from UK manufacturing data
Pension annuity income could be hit by Triple dip recession
Related internet links:
Guardian - UK services sector rise eases recession fears
SM - Service sector beats weather to grow
Telegraph - Bank of America issues 'bond crash' alert
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