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16 October 2012 last updated
UK annuity rates may lower as QE expected after falling inflation

The rate of inflation is falling and it is likely that the Bank of England will inject more stimulus next month reducing gilt yields and lowering UK annuity rates.

UK Consumer Price Index (CPI) inflation has reduced to 2.2% the lowest level in the last three years. In August CPI inflation was at 2.5% and is now quickly approaching the Bank of England (BoE) target of 2.0%. It is likely that next month the inflation rate will be below target and increases pressure on the BoE to take action with further Quantitative Easing (QE) measures.

QE involves the Bank of England injecting money into the economy by purchasing government bonds and gilts pushing up the price and decreasing the yield. As annuity rates are based on the 15-year gilt yields a decrease would mean lower annuities and income for pensioners. The Monetary Policy Committee (MPC) has suggested in their last meeting that it would consider more QE if necessary.

UK annuity rates may be lower
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How will inflation rate change in the next few months

Apart from CPI reducing to 2.2%, according to the Office for National Statistics (ONS) the other measure of inflation the Retail Price Index (RPI) also reduced from 2.9% to 2.6%.

Although falling inflation rate is good news for households on limited budgets the expectation is for inflation to increase towards the end of the year. In particular gas and electricity prices are to rise by between 6% and 9% along with food costs following a poor harvest in the US.

If these rising costs reverse the fall in inflation the BoE have not need to resort in further Quantitative Easing measures. Currently £375 billion has been injected into the economy using QE and this has not been expanded.

The government has agreed to a 2.5% increase in the basic state pension from April 2013 so the lower inflation level will not affect this benefit. Pensioners retiring and taking their benefits by purchasing an annuity may find lower UK annuity rates at the end of the year.

Apart from the threat from further QE, annuities will decrease for males from 21 December 2012 with the start of the EU Gender Directive. The new Unisex Rates will result in male rates reducing and female rates possibly increasing.

News related stories:
Annuity rates likely to lower as Bank of England gives QE hint
Retirement annuity income eroded by higher UK inflation
UK annuities to stabilise with Bank of England stance on QE
Annuity rates could remain at current levels with no more QE
Retirement annuities under threat with more BoE Quantitative Easing
Related internet links:
BBC - UK inflation rate slows to 2.2%
Unisex annuity rates to reduce annuities for males and couples
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