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5 March 2013 last updated
UK annuity income higher as service sector and markets improve

The service sector has grown for the second month in a row making a triple dip recession less likely with equity markets reaching a new high means people remaining invested and retiring will see their pension funds increase providing a higher UK annuity income.

Pension annuities have benefited from a stronger service sector which has improved from 51.5 in January to 51.8 in February. A figure over 50 indicates expansion and lower would be contraction.

Services represents 90% of the UK economy and an improvement mans the Bank of England as lee likely to consider more stimulus in the form of Quantitative Easing (QE) which would increase the price of gilts and decrease yields.

Annuity rates are based on the 15-year gilt yields and if these fall providers would lower rates. In this respect the service sector growth or contraction is an important indicator of more QE and can warn people retiring of changes in pension annuity rates.

UK annuity income higher with service sector
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Annuities income higher as equities up strongly

The Dow Jones index reached a new all-time high of 14,285 and eventually closed up 126 points with the FTSE-100 index higher by 90 points closing at 6,436. This has been driven by more confidence in the US housing market and the expectation that world economies can recover since the world economy reached a low in 2009.

The majority of people retiring remain invested up to the time they take their benefits and if their found tracks the FTSE-100 the gains will reflect the increases in the market. Since October 2011 when equities were at a recent low of 4,944, the index has increased by 1,492 points or 30.1%. Over this time period UK annuity rates are lower by 9.9%.

As an example a 65 year old in October 2011 with a fund of £100,000 could have received of £6,093 pa on a single life, level basis and even though retirement annuities have decreased the fund would have increased to £130,100. The annuity income from this would be £7,136 pa or an increase of £1,042 pa. The life expectancy for men and women of the same age is different and the Office of National Statistics (ONS) would expect a male to live for 17.8 years which would result in a gain of £18,547. For a female would live for 20.4 years and over her lifetime would gain £21,256.

15-year gilt yields recover helps annuity rates

The improving service sector data follows poor manufacturing data a few days ago showing a contraction and the fear was that a poor service figures result would pressure the Bank of England's Monetary Policy Committee (MPC) to agree to a £25 billion injection of QE.

There is less chance of this occurring and investors have moved funds away from UK government gilts to the rising equity markets causing a 7 basis point increase in the 15-year gilt yields to 2.53%. UK annuity providers are likely to keep annuity rates at current levels after recent falls in yields until there be more indication of the direction of gilts during this month.

News related stories:
Pension annuity income outlook good as service sector grows
Best annuities threat after UK service sector output falls
Highest annuity income could fall with poor manufacturing data
Best annuity income and markets fall 1.6% after US Fed stimulus fears
Pension annuity rates threat of £175bn QE from Bank of England
Current annuity rates may increase with no QE stimulus proposed
Related internet links:
Guardian - UK service sector growth reduces triple-dip recession fears
Telegraph - Global stock markets surge as Dow fuels rally
Guardian - Dow closes at record high
BBC - Dow Jones and FTSE climb to new highs
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