14 September 2012 last updated

Pension annuity income rises after Federal Reserve stimulus

The Federal Reserve have started another round of stimulus injecting money into the US economy has helped to increase UK pension annuity income for pensioners. Most UK pensioners remain in equities right up to the point they purchase their annuities and will benefit from any increases or incur a loss from any falls. Ben Bernanke chairman of the Federal Reserve is introducing a programme to buy $40 billion a month of mortgage-backed securities resulting in a rise in equity markets around the world. The FTSE-100 index has increased 133 points or 2.3% with the Dow Jones index up 259 points. With the recovery in the US slowing and growth forecast reduced from 2.4% to 2.0%, the Fed have acted with Quantitative Easing 3 (QE3) to help the economy and reduce unemployment from the current level of 8.1% which remains stubbornly high.

More annuity topics   September News 2012   News & articles   Archive news stories   Flexi-access drawdown   Annuity rates tables   Outlook for 2022   Annuity rates charts   15-year gilt yields   Latest annuity rates

Pensioners will have larger funds

The market gains in the FTSE-100 from 5,782 to 5,916 mean pensioner funds may have increased by as much as 2.3% if invested in UK equities. As an example a male aged 65 with a fund of £100,000 could purchase a single life level pension annuity of £5,746 pa and with the increase in fund to £102,300 using the same annuity rates the income £5,878 pa or £132 pa. According to the Office of National Statistics (ONS) the life expectancy of a male aged is 17.8 years so this gain will add £2,349 over his lifetime.

Since October 2011 the gain in equities has been greater as the FTSE-100 index has increased by 972 points or 19.6% from 4,944. By applying the same calculation a fund of £100,000 could have increased to £119,600 and taking into account higher annuity rates at that time the annuity income would be £6,093 pa. Even with lower annuity rates today the income from the larger fund would be £6,872 pa, an increase of £779 pa or 12.7%. Over his lifetime the gain due to the rise in equities would be £13,866 of extra annuity income.

Federal Reserve stimulus plans

To prevent the US economy from failing the Federal Reserve started the $267 billion programme called Operation Twist where long term bonds are purchased from business and exchanged for short term bonds and thereby reducing the borrowing cost of the debt. The $40 billion per month QE3 may not be enough to see a recovery in the US economy so it is likely that the Fed will increase their efforts at some time in the future.

In addition to the Federal Reserve efforts the Eurozone have the European Central Bank (ECB) and the European Stability Mechanism (ESM) to purchase sovereign bonds from struggling countries such as Spain and Italy should the cost of their borrowing increase.

As equity markets welcome QE efforts to stimulate the economy it would mean further increases in equities in the future although this may simply result in UK pensioner funds maintaining current levels so income would be impacted by pension annuity rates.