29 June 2012 last updated

Annuities rates fall may reverse with Eurozone bank bailout deal

A deal to rescue Spanish banks will see investors return to European bonds pushing up gilt yields and annuities rates. An unexpected deal emerged between Angela Merkel, the German chancellor, Mariano Rajoy, the Spanish prime minister and Italian prime minister Mario Monti has an indirect benefit for pensioners retiring in the next few months and could mean higher annuity rates with up to 4% increases. The deal was welcomed by financial markets which saw the decrease in the cost of borrowing for Spain and Italy. Spain's 10-year bond yields reduced from a recent high of over 6.8%, near the unsustainable level of 7%, to only 5.8% with Italy's borrowing reducing from 6.2% to only 4.5%. The deal is a lifeline for banks in financial difficulty and will be funded directly from the European bailout fund called the European Stability Mechanism (ESM) rather than through the sovereign country and thereby avoiding austerity measures imposed due to the loan being added to the countries debt.

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ECB to purchase sovereign bonds

A new supervisory system to monitor the bank funding will be operated probably by the European Central Bank. The ESM will also be able to purchase the bonds of countries where the yields have increased to dangerous levels, a form of Quantitative Easing for Europe and to avoid the need for other countries applying for a bailout such as with Greece. In addition to the ESM will be the growth package worth 120 billion euros to help stimulate growth as well as the Spanish bank recapitalisation of 100 billion.

The UK 15-year gilt yields reached an all time low of 2.06% on 5th June 2012. Today yields increased 11 basis points from 2.18% to 2.29% which is a sign of investors moving their funds away from UK government bonds and gilts to the attractive yields of Spain and Italy as a result of the Eurozone deal. For June standard annuities decreased by 1.11% and smoker annuity rates by 2.26% against the increase in the 15-year gilt yields of 17 basis points.

What this means for annuity rates

As a general rule this would translate into a 1.7% increase in annuity rates, however, in the short term with the recent decreases in annuities there may be room for increases of up to 2.81% for standard rates and 3.96% for smoker rates. For more information see annuity rates June 2012. This increase would depend on the confidence investors have with the ESM and if gilt yields remain level or continue to rise annuity rates are likely to increase in July.

Other positive news for pensioners is that equity markets have increased with significant gains in Europe as a result of the European bailout deal. Spain was up 5.66%, Greece up 5.33%, France up 4.75%, Italy up 6.59% and Germany up 4.33%. In the UK markets were up a conservative 78 points at 5,571 and the Dow Jones was up 277 points or 2.15% at 12,880. For pensioners that remain in equities and retiring in the next few months they could see a welcomed recover in the income from their UK pension annuity from the combined benefit of a higher pension fund and higher annuity rates.