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22 February 2013 last updated
Retirement annuities unlikely to gain after UK loses AAA rating

The UK has lost its AAA rating with Moody's downgrade after continued weakness and poor growth prospects although this is unlikely to result with investors moving funds away from UK gilts due to limited alternatives so retirement annuities will not gain.

It was thought that a loss in the AAA credit rating would mean investors looking for the highest grade sovereign debt would need to move their funds elsewhere, reducing the price of gilts and increasing yields, however, the majority of other countries have already been downgraded.

Given the options the UK is still considered a safe haven compared to other eurozone countries and gilt yields have remained unchanged and for annuities this means they are likely to remain unchanged.

As annuity rates are based on the 15-year gilt yields any increase in yields will result in higher retirement annuities in time although providers can be slow at increasing rates.

 
Retirement annuities and UK AAA rating
 
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Downgrade expected by investors

The downgrade of the UK sovereign debt by Moody's from AAA to AA1 was based on the continued difficulty to generate growth and the expectation that this will continue for the next few years. With debts close to £1 trillion or about 68% of Gross Domestic Output (GDP) and all three credit agencies having placed the UK on a "negative outlook" since last year investors have anticipated a downgrade was possible.

Credit rating downgrades are no longer exceptional as the US experienced a fall to AA+ by Standard & Poor's and France falling to AA1 by Moody's last year. Only Germany and Canada remain with their AAA rating intact and other European countries such as Spain as low as BBB- and Italy BBB+ levels from Standard & Poor's.

The outlook for the UK from here remains stable compared to the eurozone as a whole where the European Commission has warned that recession will continue for another year with unemployment increasing to 19 million or 12.2% and the economy shrinking by 0.3% this year.

Threat to retirement annuities developing

There are other developments moving investors such as fears that the Federal Reserve will slow or stop Quantitative Easing or injecting £175 billion of QE to stimulate growth by the Bank of England revealed yesterday. As a result the 15-year gilt yields reduced 9 basis points to 2.67% overshadowing the credit rating downgrade.

If gilt yields continue to decrease if will undermine the gains in pension annuity rates this year which are recovering from their all time lows reached in January this year. At the very least providers will be reluctant to push ahead with rate increases until the economic environment is clearer, even though there is still room for increases if yields remain at current levels.

News related stories:
Best annuity income and markets fall 1.6% after US Fed stimulus fears
Pension annuity rates threat of £175bn QE from Bank of England
UK annuity rates rise 1.5% from Legal & General as gilt yields fall
Pension annuity rates may increase if UK loss of AAA rating
Related internet links:
Telegraph - Britain's credit rating downgraded from AAA
Guardian - George Osbourne under pressure as Britain loses AAA
BBC - UK loses top AAA credit rating
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