17 October 2012 last updated

Pension annuities gain as bailout for Spain sees market up

Spain has made initial moves for a bailout which has been received positively by markets and means pension annuities gain with larger funds and more income. By considering a line of credit from the European Central Bank (ECB) from the new bailout mechanism Spain hopes to be able to reduce the cost of it's borrowing to manageable levels. The cost of borrowing in recent months has been higher than the unsustainable 7% level and the markets have welcomed news of assistance from the ECB with a potential lending capacity of 500 billion euros. Markets have moved higher with the FTSE-100 index 65 points higher at 5,870 and the Dow Jones index 128 points higher at 13,552. In Europe Spain Ibex index was 3.4% higher and this means any pensioners retiring now with their fund still invested in equities will benefit with a larger fund to buy their pension annuity.

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Gilt yields improve to higher levels

Annuity rates are based on the 15-year gilt yields which have increased by 8 basis points today to 2.28%. In general an 8 basis point rise would mean a 0.8% increase in annuity rates and Canada Life have increased their rates slightly although this has mainly benefited annuitants age around 75 where Canada Life is leading the market.

The combination of rising equities and annuity rates can hugely benefit pensioners at retirement although there are risks by remaining invested just before taking benefits and buy their annuity. The rise in equities could add 1% to a fund which would add this amount to annuities. As an example for a 60 year old male with £100,000 fund the annuity of £5,146 pa would increase by £51 pa to £5,197 pa and over the pensioners 21.5 year life expectancy according to the Office of National Statistics (ONS) this would result in an extra £1,099. It markets moved lower by 1% the pensioner would lose this amount.

If Spain opens up a line of credit for the ECB bond-buying program it could see the cost of their borrowing decrease with their 10-year bonds falling by 1.5% with a further surge in equity markets. The security of these bonds would increase and investors who have funds in the safe haven of UK government bonds and gilts would be happy to move back to Europe. This would lower the price of UK gilts and increase yields to the benefit of pensioners buying their annuity.