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12 December 2012 last updated
Retirement annuity income kept high with Federal Reserve stimulus

Pensioners invested in equities and retiring are benefiting from US Federal Reserve ongoing stimulus using QE3 with markets currently strong allowing high pension values to offset lower annuity rates.

Ben Bernanke of the Federal Reserve intends to keep interest rates in the US near zero until unemployment levels fall below the 6.5% level compared to the current level of 7.7%.

The Federal Reserve will also continue the stimulus programme of spending $85 billion per month buying government bonds and mortgage backed securities which is the US version of Quantitative easing called QE3.

This is seen as a positive move with markets and as the UK and European markets tend to be influenced by the direction of the US equities. Pensioners with a balanced portfolio with exposure to these markets can expect a higher fund value which will provide a greater retirement annuity income.

Pensioner fund values remains high
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Income higher even though annuities are lower

Pensioners are benefiting from high equity markets with the FTSE-100 index at 5,946 and the Dow Jones index at 13,245.
Although annuity rates are at historical lows, the rise in equities means that the income a pensioner can receive is higher than it was in June 2012 as equities have increased by 12.8%.

For example, in June a male aged 65 with a fund of £100,000 could purchase a pension annuity on a single life and level basis for £5,962 pa. His fund would have increased to £112,800 and even though annuity rates have reduced to 5.59% the income now would be £348 pa higher at £6,310 pa.

US threats remain to pensioner income

The Federal Reserve stimulus strategy is changing in order to boost the US economy. There is a threat that this could be derailed with the difficulties over the fiscal cliff where Congress is negotiating a series of spending cuts and tax rises due to be implemented in full from January 2013.

The Fed has said that it does not have the ability to counter the fiscal cliff if an agreement is not reached. The Fed is changing the current asset-buying scheme called Operation Twist where short term bonds are sold to buy long term bonds with a lower interest rate to keep interest rates down. Instead they will buy long-term bonds.

For pensioners retiring the combination of the Federal Reserve stimulus strategy and a resolution of the fiscal cliff will mean a high equity market in 2013 which will be essential to counter the lower expected annuity rates.

News related stories:
Pension annuity income rises after Federal Reserve stimulus
Pension annuity income and equities rise after fiscal cliff deal
Annuities income reduce as equities fall with fiscal cliff deadlock
UK annuity income from pension funds boosted by fiscal cliff offer
Pension annuity income and markets lower with US fiscal cliff
Related internet links:
Guardian - Fed keeps rates near zero
BBC - Fed sets new interest rate targets
Pension annuity income rises after Federal Reserve stimulus
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