4 October 2012 last updated

Retirement annuities under threat if BoE move for more Quantitative Easing

The Bank of England have opted to leave Quantitative Easing at £375 billion but hinted for the need of more stimulus from last months meeting minutes with could hit retirement annuities. Interest rates have remained at 0.5% and Quantitative Easing (QE) at £375 billion by the Monetary Policy Committee (MPC). This follows the decision last month where the Bank of England's MPC also did not make any changes. More QE would mean that gilt yields would decrease as an injection of money by purchasing government bonds and gilts would increase the price thereby reducing yields. As annuity rates are primarily based on the 15-year gilt yields any change would threaten to decrease annuities. The Bank of England has set a target for inflation of 2% for the Consumer Price Index (CPI). If inflation falls to this level the BoE would have to take measures to prevent it overshooting.

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Bank of England open to more QE if necessary

From the MPC minutes last month all nine members voted to maintain interest rates at 0.5% but some of the members though that additional stimulus would be necessary in due course. It was anticipated that inflation would not fall back to 2% this year although demand remained weak and a good case could be made for more Quantitative Easing. If interest rates do reduce at a rate faster than expected it may be sufficient for the Bank of England to consider a further injection of stimulus.

For pensioners retiring in 2012 it would be worth purchasing their annuity sooner rather than later to avoid lower pension income as another round of QE would result in a fall in annuity rates. Providers are currently in a downward cycle for pricing annuities and are sensitive to any decline in gilt yields so they would be quick to reach with lower rates.

Apart from this the EU Gender Directive is also going to make an impact with lower male and joint annuity rates by possibly up to 4.7%. The new Unisex Rates will be introduced from 21 December 2012 and providers are currently finalising their schedule for introducing these rates.