15 June 2012 last updated

Standard annuity rates fall as BoE announces stimulus package

The Bank of England is to introduce two stimulus packages to help the economy and this will reduce the yields on gilts pushing annuity rates lower. Canada Life has reduced their standard annuity rates by 1% as the 15-year gilt yields reduce by 6 basis points after yields reached the highest point for the month. Gilt yields reached 2.32% on Wednesday this week and have now reduced to 2.25% and as a general rule a 6 basis point reduction in yields will result in a 0.6% fall in annuities. Canada Life has 30% of the leading pension annuity rates with funds of £100,000 and the fall in their rates does not change their position as other providers such as Legal & General and Aviva have already made reductions. This is part of the long term fall in rates as the Bank of England prepares for the next round injecting money to boost the UK economy.

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Bank of England more stimulus

Gilt yields suffered today with the announcement from the Bank of England to launch two stimulus packages for the UK and threatens further reduction in annuities and lower income for pensioners. The Bank of England will provide billions of cheap loans direct to banks to lend to customers and companies rather than using their current stimulus package of quantitative easing (QE). QE has provided £325 billion and requires the BoE to purchase Government bonds with the intention of increasing the supply of money to institutions which can be used to purchase other assets.

The governor Sir Mervyn King is concerned with the developments in the Eurozone which have increased the cost of funding in the banking sector and the new stimulus is designed to counter this problem for the next several of years. The first part of the scheme will see an increase to lending of £80 billion and the second part called the Extended Collateral Term Repo Facility outlined in December 2011 would allow banks to borrow up to £5 billion a month to help with liquidity shortages.

The European Central Bank (ECB) has also said it is ready to support the banking system in the Eurozone and as a result equity markets have been buoyant with European markets up about 1.0%, the FTSE-100 index up 10 points to end at 5,478 with the Dow Jones up 115 at 12,767. There has been a trend with stimulus packages since the financial crisis began and markets have always increased in value as a result. This could mean that pensioners retiring remaining in equities will benefit with increasing fund values and would mean a boost in the income they can receive from an annuity.