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16 August 2012 last updated
Pension annuities to benefit from increasing gilt yields

Gilt yields have increased by 22 basis points since the all time low and means annuity rates could be set to rise.

Since reaching a low of 2.02% on the 2 August as a result of uncertainty over the Eurozone and the ability of the European Central Bank to support the euro, gilt yields have increased to 2.24% last reach on 2 July.

As annuities are primarily based on the 15-year gilt yields a 22 basis point rise would roughly translate into a 2.2% increase in pension annuities at some time. However, providers had not fully reduced annuity rates in line with the fall in yields so the up side is not as great.

Even so annuity rates are not under the same level of downward pressure experienced at the beginning of the month so providers have more flexibility to offer improved annuities. Although providers can reduce rates quickly they may be slow to increase rates.

Pension annuities increase possible
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What does this mean for pension annuities

The improving gilt yields suggest that standard annuities could increase by 0.5% with impaired annuities increasing by 1.5% and smoker annuity rates increasing by 1.2% assuming yields remain at their current level of 2.24% or increasing. For the latest updates see Annuity Rates Review.

The Bank of England's monetary policy committee (MPC) decided to leave interest rates at the current level of 0.5% and not to extend Quantitative Easing (QE) further than the current level of £375 billion. Although they have said this was a narrow decision, with the unexpected news that inflation has increased for the month it is unlikely they will consider more QE in the short term to avoid a further rise in inflation.

QE has the tendency to increase inflation by injecting money into the economy and as the Consumer Price Index (CPI) is at 2.6% in July up from 2.4% in June, the Bank of England would need to see this falling again towards the target for CPI of 2.0% before risking another round of QE. In the mean time the MPC is perusing the Funding for Lending Scheme (FLS) to stimulate the economy where banks and building societies receive low cost loans to lend to business and consumers.

With both rising gilt yields and no
immediate plans for Quantitative Easing, pension annuities could see some upward movement. All that is required now is an appetite from providers to increase annuity rates although if they resist it would mean greater profits for them in the short term.

News related stories:
UK annuity rates fail to move higher despite gilt yields recovery
Annuity rates could fall again as 15-year gilt yields at all time low
UK annuity rates fall to lowest levels as gilt yields struggle to improve
Annuities pressured as 15-year gilt yields at all time low
Impaired annuity rates fall 1% after week of declining gilts
Related internet links:
BBC - Bank of England MPC hint further QE possible
Guardian - QE more liekly than interest rate cuts
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