Well what a week.... most of the UK has been sweltering under 90F temperatures, the royal baby arrived and to top it all the first draft of economic data from the Office for National Statistics reveal that the UK economy (GDP) grew by 0.6 per cent in the second quarter of 2013.
Clients have asked me several times this week about their pension income and what, other than the fund value, can influence how much they will receive. There are three main factors affecting the amount of income that will be payable:
Life expectancy – linked to age, health and, until December 2012, gender: Annuities are a guarantee of an income for life, therefore the rates they’re based on change as life expectancy increases. The younger people are when they retire, the longer they are likely to have in retirement and the longer the annuity is likely to be payable. For this reason, a 60-year-old will generally receive a lower income than a 70-year-old. If the client or the dependant of an annuitant as a medical or lifestyle condition they may qualify for an increased income through ‘enhanced’ terms. This normally pays a higher income. Until December 2012 annuity rates could be based on gender. Generally, females received less income as they lived for longer but since then annuity rates must be on a gender neutral basis by law.
Gilt yields from government bonds: The government issues gilts to raise money and in return they pay a fixed amount of interest. Gilts are traded on the stockmarket and the demand for and supply of them will determine their value. If demand increases then prices rise so yields fall and vice versa. Annuity providers predominately buy gilts to match their annuity liabilities. Therefore, movement in yields will impact the annuity rates offered and lower yields generally means lower rates and vice versa.
Annuity options: They can be single life or joint life; guaranteed or not guaranteed; escalating or level; the frequency of payments; whether payment is in advance or in arrears; with or without overlap. The more options added the lower the income will be. Likewise, the type of option taken has an impact e.g. a ten year guaranteed annuity will pay less than a five year guaranteed annuity and a joint life annuity where there is no reduction on death would pay less than one with a 50 per cent reduction on death.