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26 July 2012 last updated
Pension annuities income boosted as ECB pledges to save the euro

Pensioners that remain invested before buying their pension annuities will benefit from rising equity markets due to the ECB pledge to save the euro at any cost.

European Central Bank (ECB) president Mario Draghi has pledged to do "whatever it takes" to rescue the euro and this was greeted positively by the European equity markets up between 2-6%.

This increase is a good result for pensioners that remain invested in a diversified portfolio with a spread in Europe, US and the UK and will mean their pension fund will increase in value.

The markets have been lower in the last week and this has a direct impact on the income a pensioner can receive from an annuity at retirement.

Once a lifetime annuity is purchased it cannot be changed so larger fund increases the income assuming annuity rates do not decrease.

UK pensioner income boosted
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Market confidence increases pension fund value

Equity markets have been suffering from a lack of decisive action by the ECB to deal with the Eurozone debt crisis and pensioners retiring have regularly found that their funds have reduced in value by the time they purchase their annuity, even if annuity rates do not decrease.

With greater confidence in the Eurozone's commitment to solve the debt crisis investors can return to equities and the benefit will be immediately seen by UK pensioners with an increase in their pension funds and income in retirement. Equity markets are higher with Madrid increasing by 6.06%, Paris by 4.07% and Germany by 2.75%. In the UK the FTSE-100 index was up 75 points at 5,573 and the Dow Jones up 211 at 12,909.

Gilt yields have also increased slightly with the 15-year gilt yield increasing 2 basis points to 2.06%. This is just above the all time low level of 2.03% so pension annuities are still at risk of decreasing further as gilt yields have reduced from 2.29% since last month. This represents a fall of 23 basis points and as a general rule would mean annuity rates would decrease by 2.3%. Annuity rates have decreased by about 1.0% and taking into account decreases last month this would mean a further 1.0% reduction is possible. For the latest updates see Annuity Rates Review.

ECB action reduces cost of Spain's borrowing

Spain is also paying less to borrow with the 10-year bond yields now below the 7% level deemed unsustainable in the long term, and now more manageable at 6.8%. Earlier in the week the yields went as high as 7.6% and the markets feared a bailout was imminent. The expectation is that the Securities Market Programme (SMP) will be re-introduced allowing the ECB to buy government bonds from financial institutions, similar to quantitative easing in the UK, reducing the cost of sovereign countries issuing bonds and hence the fall in the cost of borrowing for Spain and Italy.

If investors confidence increases it would mean less need for safe havens such as UK government bonds and gilt yields are likely to increase. This would give providers more margin and impaired annuity rates would be the first to increase. Standard and smoker annuities would remain at current levels and would require the 15-year gilt yields to increase to higher levels of say 2.3% before providers increase these pension annuity rates.

News related stories:
UK annuity rates fall up to 1.9% as Spain's bond yields soar
Impaired annuity rates react and fall to bailout for Spain
Best annuity rates decrease possible with Spain's debt crisis
Annuities rates fall may reverse with Eurozone bank bailout deal
UK annuity rates fall as Eurozone fear spreads to markets and gilts
Related internet links:
BBC - ECB will act to save the euro
Guardian - Spanish bond yields lower on euro rescue
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