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10 May 2013 last updated
Pension annuity income 12.3% up as FTSE-100 index hits new high

The FTSE-100 index continues to rise closing at 6,625 for the first time since October 2007 as central banks confirm their stimulus programmes and means pension annuity income is now 12.3% higher this year based on equities alone.

The majority of people retiring remain invested before taking their pension annuity and in a falling market this can mean a significant loss of income at a critical time.

Since the beginning of the year when the FTSE-100 was at 5,897 it has increase by 728 points or 12.3% and people that track the index will find this gain is reflected in the fund when it comes to buying annuities.

Central banks such as in the US and Japan have large stimulus packages and low interest rates forcing investors to find higher returns in the equity markets which has also helped drive the 15-year gilt yields 22 basis points higher to 2.44% which will also help annuity rates.

Pension annuity income up with FTSE-100 index
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Income from annuities 17.5% higher in total

Apart from the rise in equity markets UK annuity rates have also been increasing and people retiring can receive 17.5% more income from their pension fund than in January 2013.

As an example by using our benchmark for a person aged 65 using a fund of £100,000 to purchase a retirement annuity on a single life, level basis, in January this would have provided an income of £5,373 pa. The fund had it tracked the FTSE-100 index would have increased to £112,300 and annuities have also increased 4.6% resulting in a higher income of £6,316 pa.

This rise can make a significant difference over the lifetime of the individual and the Office of National Statistics (ONS) would expect a male to live for 17.8 years. This means an improvement of £941 pa would result in £16,749 more annuity income over his lifetime. For a female she would be expected to live for 20.4 years resulting in £19,196 more annuity income over her lifetime.

Gilt yields rise to 2.44% as equities reach new high

Annuity rates are based on the 15-year gilt yields and these have increased 22 basis points since the started the month at 2.22%. In general this would translate to a 2.2% increase in annuities and the impaired annuity providers are most likely to take action although the standard annuities are unlikely to change quickly.

The rise in yields has been due to a combination of factors including good US job data, no further stimulus in the form of Quantitative easing from the Bank of England and the rise of equities making this more attractive to investors than UK government bonds and gilts.

Gilt yields have been volatile this year as investors are sensitive to events that could mean a return to eurozone uncertainty and reduction in global growth. The range for 15-year gilt yields this year has been 59 basis points from 2.17% to 2.76% which would produce a 5.9% difference in annuities depending on when a person retires.

News related stories:
Annuities income boost as FTSE index and service sector improve
UK annuity income gains with FTSE-100 index 2% higher
Retirement annuity income up as FTSE-100 index reaches a new high
Annuity income lower as markets and gilts fall on Italy election deadlock
Best annuity income and markets fall 1.6% after US Fed stimulus fears
Related internet links:
Guardian - FTSE 100 hit highest since October 2007
Telegraph - FTSE100 closes above 6,600 first time since 2007
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