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22 October 2013 last updated
UK annuity rates under pressure as yields fall after poor US jobs data

Gilt yields have reduced by ten basis points after the 148,000 US jobs added was below target with investors expecting the Federal Reserve to delay tapering making it unlikely that UK annuity rates can improve in the short term.

Annuity rates are primarily based on the 15-year gilt yields and as a general guide a 10 basis point change in yields would result in a 1.0% fall in annuity rates.

Yields had increased this year from 2.31% to 3.38% reducing to 3.05% after uncertainty in the US with providers of both standard and impaired annuity already lowering rates in response.

Since December 2012 annuities have increased by 10.9% whereas yields are up by 7.2% suggesting rates could fall by up to 3.7% in the long term.

Providers may hold their position while yields remain over the psychological 3.0% as there is much volatility in the market with investors trying to guess which direction the US is going with their policy over their stimulus.

UK annuity rates under pressure
  Poor US jobs data sends gilt yields lower as investors buy bonds pressuring UK annuity rates
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US jobs data suggest recovery is faltering

Investors are betting that the US Federal Reserve does not taper stimulus and the $85 billion per month Quantitative easing continues to buy bonds keeping the prices high and preventing yields from rising and increasing pressure on UK annuities.

US data shows 148,000 jobs were added in September reducing the unemployment rate to 7.2% down from 7.3% in August. The figure was lower than the expected 180,000 suggests the recovery is losing momentum. It could also be due to the US debt ceiling crisis where government closed a number of services which may have had an impact on employers deferring recruitment until the crisis was resolved.

The budget issues are not resolved and must be reviewed again in January 2014 with possibly another display of political brinkmanship unsettling markets. The government shutdown may have reduced economic activity by $24 billion according to the credit agency Standard & Poor's which would reduce growth by 0.6% in the forth quarter.

Equity market higher benefits people retiring

Equity markets moved higher with the FTSE-100 index up 41 points at 6,696 and the Dow Jones 75 points higher at 15,468 in anticipation of stimulus continuing even though data suggesting a slowing economy should negatively impact on equity markets.

Since reaching a recent low of 6,338 the FTSE-100 index is now 5.6% higher and this will benefit anyone retiring where they remain invested in equities that track the index. As an example, for someone aged 65 with a fund of £100,000 they can receive an income from a single life, level annuity of £6,019 pa and with the increase in equities this would improve their fund to £105,600 and improve their income by £337 pa to £6,356 pa.

The Office of National Statistics (ONS) would expect a male to live for 17.3 years and he will have £5,830 more over his lifetime. For a female she can expected to live for 20.4 years increasing her income by £6,874.

For people buying their annuity now the recovery in equities will have offset the recent fall in annuity rates so now is a reasonable time to take benefits while waiting until next year may experience volatility in January as the US negotiate their debt ceiling.

News related stories:
Pension annuities to recover as US debt ceiling deal is agreed
UK annuity threat as yields fall with looming US debt ceiling
Annuity Rates stabilise as US Fed delays tapering stimulus
Retirement annuities threat as yields fall on UK and US stimulus plans
Related internet links:
BBC - US added 148,000 jobs in September
Telegraph - Fed likely to delay tapering with US jobs data
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