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10 January 2013 last updated
Current annuity rates increase possible with no QE stimulus proposed

The Bank of England has decided not to inject money into the economy leaving Quantitative Easing (QE) at £375 billion which may help current annuity rates to rise in the first quarter of the year.

QE injects money into the economy by purchasing gilts which increases the price and decreases the yield. Pension annuities are primarily based on the 15-year gilt yields and with the Bank of England avoiding QE means annuity rates will not reduce due to this factor.

Since the beginning of the month the 15-year gilt yields have increased by 26 basis points and in general this would translate into current annuity rates increasing by 2.6%.

Due to the EU Gender Directive UK annuities have reduced further than expected after adjusting for Unisex rates the possible increases in standard rates could be 3.1%, smoker rates by 3.6% and impaired annuity rates by 5.4%.

Current annuity rates may rise with no QE
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Providers resist increases after Unisex annuity rates

Providers reduced annuity rates as
the new rules deadline approached for Unisex annuities even though since 2 August 2012 when gilt yields reached an all time low of 2.02% annuities were also reduced at that time to reflect the correction so both were in parity and yields have since improved to 2.57% today.

This would suggest that a pensioner aged 65 with a fund of £100,000 could buy a pension annuity on a single life, level basis for £5,425 pa and this could increase by £168 pa to £5,593 pa. Based on the Office of National Statistics (ONS) life expectancy a male would live for a further 17.8 years and would receive £2,990 more whereas a female would live for 20.4 years and receive £3,427 over their lifetimes.

Although EU Gender Directive has achieved equality in income received each year over a persons lifetime females will be better off than males. In terms of the lifetime income for current annuity rates, the male would receive £96,565 and the female £110,670 or a difference of £14,105 for for the female for exactly the same investment which is substantial considering the male will not even receive his money back.

Bank of England waiting for clearer economic signals

The Monetary Policy Committee (MPC) decided against more Quantitative Easing and left interest rates at 0.5%. Fortunately for UK annuities the BoE have reached a point where the benefits of QE do not outweigh the downside of greater inflation in the economy and will pursue other methods to revive the economy such as the Funding for Lending Scheme.

The MPC have ruled out QE for March and April so pensioners retiring in the next few months will not have to consider this threat to buying their pension annuities, however, QE has not been totally removed and could return later in the year if the economy does not improve.

News related stories:
Annuity rates likely to lower as Bank of England gives QE hint
UK annuities to stabilise with Bank of England stance on QE
Annuity rates could remain at current levels with no more QE
UK annuity rates may lower as QE expected after falling inflation
Retirement annuities threat if BoE move for more Quantitative Easing
Related internet links:
Guardian - BoE keeps QE on hold due to economy
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