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26 April 2013 last updated
Retirement annuity risk as gilt yields fall after ECB criticism

The 15-year gilt yields have reduced by 4 basis points increasing the risk to retirement annuities after the Bundesbank attacked the position of the ECB in a German court as the bank of last resort for Spanish and Italian debt.

Retirement annuities are primarily based on the 15-year gilt yields and any change in yields will affect UK annuity rates.

In July 2012 the European Central Bank (ECB) president Mario Draghi pledged to do "whatever it takes" to rescue the euro by purchasing the debt of countries in financial difficulty at the time such as Spain and Italy as the cost of their debt reached unsustainable levels.

The statement was a turning point for equity markets, bond and gilt yields which reached an all time low of 2.02% before recovering as confidence returned to investors. By questioning the ECB the Bundesbank is risking a return to instability in the market and lower UK annuities.

Retirement annuity risk after ECB criticism
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German court to rule on ECB bailout plan in June

The Bundesbank has submitted a detailed report to the Court criticising the ECB plan called Outright Monetary Transactions (OMT) saying it violates fundamental principles, is high risk and outside of the ECB's mandate which does not extend to to uphold the current composition of monetary union.

The German constitutional court will rule on the ECB plan on 12 June and it if they do not accept the plan it will mean the collapse of the euro. In September the court provisionally accepted the plan but limited Germany's exposure to any bailout to 190 billion euros and that Germany cannot be exposed to an unlimited exposure as stated in the plan.

UK annuity rates depend on investor confidence

When the ECB plan was announced last year investor confidence was restored and since then the 15-year gilt yields have averaged over 2.3%. Yields have been more stable when compared to the uncertainty last summer in the eurozone. The debt of Greece, Spain and Italy has also returned to manageable levels well below the critical yields at the time although this fear of uncertainty can return if investors believe the ECB could never honour it's pledge to do "whatever it takes".

Gilt yields increased to 2.76% in February only to collapse after uncertainty over the Italian election, Cyprus tax on savers and poor US jobs data reducing yields to 2.17% as investors returned to safe havens such as US Treasury notes, UK government bonds and Gilts and German Bunds.

At the current level of 2.24% standard pension annuity rates are higher than they should be although providers such as Legal & General, Canada Life and Aviva are in a competitive cycle. This means annuities could remain at current levels and not decrease in the short term.

Impaired annuity providers have been reducing they rates over the last month reflecting the falls in yields this month for single life rates although MGM Advantage have increased the highest joint rates for smokers by between 4-7% to win business and these are unlikely to be sustainable in the medium term.

News related stories:
Gilt yields fall after US budget cut and Cyprus bank account fears
Gilt yields lower as investor fear US Fed comments and Italian election
Latest annuity rates may fall 4% as gilt yields collapse after US jobs data
Pension annuities risk with gilt yields fall as Cyprus reject bailout deal
Annuity income lower as markets and gilts fall on Italy election deadlock
Pension annuities income boosted as ECB pledges to save the euro
Related internet links:
Telegraph - Bundesbank criticises ECB bailout plan in German court
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