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29 September 2013 last updated
UK annuity threat as yields fall with looming US debt ceiling

Yields have reduced 26 basis points to 3.10% threatening a fall in annuity rates after the Federal Reserve delays tapering the stimulus package and the impending US debt ceiling being reached.

The US government reached it's $16.7 trillion borrowing limit in May and by 17 October only a cash cushion will be left forcing the US Government and Republican run House of Representatives to negotiate an extension to avert a shutdown of essential services.

Retirement annuities are mainly based on the 15-year gilt yields and a 26 basis point decrease will result in a 2.6% fall in annuity rates. Impaired annuity rates are very sensitive to changes in yields and Liverpool Victoria have reduced their rates by 1.8%.

Providers of standard rates have not made any changes yet and a re likely to wait until October before making changes if yields do not recover.

Investors have been moving funds to safe havens while uncertainly remains over the US debt ceiling until a new agreement can be reached.

UK annuity threat with looming US debt ceiling
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US Congress on path to debt brinkmanship

Since reaching the $16.7 trillion debt ceiling in May the US has embarked on a series of "extraordinary measures" such as reducing short term expenditure to extend the time before it runs out of money, finally on 17 October. At this time there will be only $30 billion in emergency cash which would not be enough to cover expenditures which can be $60 billion a day at certain times.

The US Government and Republican run House of Representatives need to agree to increase the borrowing cap to avert a shutdown in government services, similar to the one agreed during the "Fiscal Cliff" in December 2012 and agreed this year. At this time political brinkmanship created considerable uncertainty in the markets. If agreement is not reached equity markets are likely to fall significantly and investors will continue to see safe havens such as bonds and gilts, forcing the price up and yields down.

The Republicans want to reduce the level of expenditure such as President Barack Obama's healthcare plan which will conflict with the governments position.

UK annuities at risk of falling without agreement

Gilt yields have been rising strongly this year after investors expected the US Federal Reserve to stop the $85 billion a day stimulus package. The bond market has been artificially inflated by the Fed buying debt such as bonds and mortgage debt increasing the price and reducing the yields.

The move to stop the stimulus has spurred markets to sell bonds driving the yields higher. So far this year the 15-year gilt yields have increased 107 basis point from 2.31% in December 2012 to 3.38% driving annuities higher with our benchmark example for a person aged 65 with a fund of £100,000 buying a single life, level annuity up 13.53% over this time.

Impaired annuities have already started to decrease with Liverpool Victoria reducing their rates and smaller decreases from Just retirement.

If standard UK annuity rates fall by 2.6% this would reduce the benchmark by £160 pa to £5,999 pa and over a lifetime this will reduce the income from a pension fund. The Office of National Statistics (ONS) would expect a male to live for 17.3 years and he will have £2,768 less over his lifetime. For a female she can expected to live for 20.4 years reducing her income by £3,264.

News related stories:
Annuity Rates stabilise as US Fed delays tapering stimulus
UK annuities boost as Fed plan to taper QE to start from September
Retirement annuities threat as yields fall on UK and US stimulus plans
Buying pension annuities now made safer with US congress vote
Annuities income reduce as equities fall with fiscal cliff deadlock
Related internet links:
Guardian - US Treasury warns Congress on debt ceiling
BBC - US to hit debt ceiling by October
Telegraph - America to hit debt ceiling by October
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