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22 August 2012 last updated
UK annuity rates could see downward pressure from Greece failure

Greece has been given a last chance by Eurozone to reduce public finances and a failure to do so could result in a euro departure and UK annuity rates reducing.

The Eurozone is loosing patience with Greece to implement economic and structural reform, reduce public finances as well as making changes to the labour force.

If this cannot be achieved it would see Greece leave the euro and in the short term chaos would engulf the markets with investors moving funds to safe havens such as UK government bonds and gilts.

This would increase the price of gilts lowering the yield and as annuity rates are based on the 15-year gilt yields annuities would reduce as a consequence.

Although the Eurozone is talking tough over Greece it is likely that a short term solution will be found to prolong the crisis and delay the inevitable which may soften the impact of a Greek euro departure and avoid contagion.

Greece exit means lower annuity rates
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Greece crisis will continue to be a threat

As part of the 130 billion euro bailout Greece has to find spending cuts of 11.5 billion euros over the next two years plus an additional 2 billion euros to offset lower tax revenues as the economy slows making a total of 13.5 billion euros.

Greece is asking for a further two years to meet the austerity measures and if this is allowed they would not require a third bailout. Over the past two years Greece's economy has contracted by 13% and shows that the country is in a downward cycle of austerity and economic depression. The current talks are around whether Greece will receive the next installment of 31.5 billion euros of the original bailout to avoid the next default on its debts.

The current fear is that a Greek departure from the euro will result in contagion with Spain and Italy. This may see their debt spiraling out of control requiring the European Central bank (ECB) to support Spain and Italy by purchasing government debt in order to increase the price and lower the yield. Fear would drive current investors of sovereign debt in Spain and Italy and seek safe havens such as US Treasury Notes, German Bunds and UK government gilts pursing yields lower and of course UK pensioners buying annuities would be hardest hit immediately with lower pension annuity rates.

Annuity rates could improve in short term

Gilt yields have reduced today with the 15-year gilt yields lower by 6 basis points at 2.21%. As yields have increased in August from a low of 2.04% the current
situation with annuity rates is not critical due to the fact that providers have reduced rates beyond the fall in gilt yields. As a rough guide a 10 basis point reduction in yields will result in a 1% decrease in annuities. For standard annuities it is possible for an increase of 1.3% with smoker and impaired annuity rates increasing by a possible 1.8%. See Annuity Rates Review for the latest updates.

News related stories:
Annuity rates decrease even as gilt yields remain unchanged
Pension annuities will benefit from increasing gilt yields
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
Related internet links:
BBC - Greek facing last chance says eurozone
Guardian - Greece hopes for leniency over austerity
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