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19 December 2012 last updated
UK annuity income from pension funds boosted by fiscal cliff offer

Barack Obama has made an offer to avoid the US fiscal cliff from being implemented in January boosting markets around the world which benefits pensioners and their annuity income.

With the impending $600 billion of spending cuts and tax rises from january 2013, the White House has made an alternative offer to the lower limit of higher taxes for those earning $250,000 or more increasing this limit to $400,000.

The Republican House of Representatives has insisted on the level being $1 million and above and the concession from President Obama brings the parties closer to a resolution.

Equity markets increased with the FTSE-100 24 points higher at 5,936 and the Dow Jones up 116 at 13,350. For pensioners retiring to purchase annuities it is a welcome boost as annuity rates have been falling this month despite a significant in the 15-year gilt yields which would indicate a rise in annuities.

Fiscal cliff increases annuity income
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Market rise offsets fall in annuity rates

The recent strong performance in equity markets will benefit pensioners that remain invested up to the point they purchase their annuity. The FTSE-100 index reached a low of 4,944 in October 2011 and is now 20% higher at 5,936 and this would be reflected in the pension fund if the portfolio tracks the index.

At the time a male aged 65 with a fund of £100,000 could purchase an annuity on a single life, level basis and receive an annuity income of £6,093 pa. Annuity rates have fallen since October 2011 and this figure has decreased by £499 pa or 8.1% to £5,594 pa. Despite this decrease the gain in equities means the fund would have increased to £120,000 which could be used to purchase an annuity for £6,712 pa, even with lower annuity rates.

Further gains possible if a deal can be reached

Pensioners could benefit from further equity gains before buying their annuity as the fiscal cliff has been a risk to the market for most of this year. If President Obama and the Republican House of Representatives can avoid the activation of spending cuts and tax rises from january 2013 it will boost confidence in the first quarter of the year.

Originally President Obama proposed to raise $1.6 trillion in taxation over the next 10 years and this has been reduced to $1.2 trillion. If a deal cannot be found the tax increases would mean the fiscal cliff would cost the US economy $600 billion and could push the country back into recession. It would also lower equity markets around the world and reduce the pension annuity income for pensioners.

News related stories:
Buying pension annuities now made safer with US congress vote
Pension annuities benefit as FTSE index at pre-financial crisis high
Pension annuity income and equities rise after fiscal cliff deal
Annuities income reduce as equities fall with fiscal cliff deadlock
Retirement annuity income kept high with Federal Reserve stimulus
Pension annuity income and markets lower with US fiscal cliff
Related internet links:
Telegraph - Obama fiscal cliff concession lifts market
BBC - Obama makes new fiscal cliff tax offer
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