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25 May 2012 last updated
Annuities threatened as UK economy shrank by greater than expected

The UK economy contracted by a greater amount than expected in the first quarter and could mean action will be taken by Bank of England and threaten to reduce annuities.

Figures from the Office for National Statistics (ONS) have been revised and show that the UK economy had shrank by a greater amount than previously thought, with gross domestic product (GDP) contracting by 0.3% rather than 0.2% in the first quarter. This confirms that the UK economy is officially in a double dip recession following on from the fourth quarter of 2011.

There is also a risk that the economy will contract in the second quarter of 2012 as suggested by the governor of the Bank of the England Mervyn King with the Queen's Diamond Jubilee expected to reduce output in June. The BoE is likely to take action with further stimulus by extending Quantitative Easing which would reduce gilt yields and decrease annuities for pensioners.

Annuities threatened by UK economy
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Economy not recovering

UK manufacturing stalled last month with the manufacturing PMI index 50.5% in April compared to 51.9% in March. The UK economy is not recovering as it has in previous recessions and even the 1930-34 recession recovered strongly after the 42nd month whereas this recession continues to persist after 55 months. This means that in order to stimulate growth and a recovery it is likely that the Monetary Policy Committee of the Bank of England will expand further Quantitative Easing (QE) from the current level of £325 billion.

QE involves injecting money into the economy by purchasing UK government bonds and gilts which has the effect of driving prices of gilts up and the yields down. As annuity rates are primarily based on the 15-year gilt yields any change in yields will means annuities will change in the same direction. Therefore QE is likely to mean lower annuity rates over the summer months.

Spanish bank needs funding

In Europe Spain's fourth largest bank Bankia is seeking a 19 billion euro bailout only two weeks after it received a 4.47 billion euro loan from the Spanish bailout fund in exchange for 45% of the shares in the bank making it partially nationalised. This was required due to the bad debts associated with loans made in Spain's failing property market and Spanish banks have a 300 billion euro exposure after the property bubble burst five years ago with 180 billion of this being problematic.

As the Spanish banking crisis unravels it is likely that investors will continue to move funds to safer locations and UK gilt yields may reduce further taking pension annuity rates lower.

News related stories:
Pension annuity income boosted by equities gain
Impaired annuity rates increase despite UK double dip recession
Annuity rates may lower if UK inflation fall leads to more QE
UK annuity rates fall as Eurozone fear spreads to markets and gilts
UK pension annuity income may reduce with lower inflation and QE
Related internet links:
BBC - UK economy shrank more than thought
Guardian - Spain in recession with £15bn bank bailout
BBC - Spains's Bankia seeks 19bn euro bailout
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