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6 February 2013 last updated
Annuities rates may lower if OECD call for more stimulus is agreed

The Bank of England may need more Quantitative Easing (QE) says OECD as the economy struggles to realise any growth which would reduce gilt yields and result in annuities rates falling for people retiring.

After the financial crisis QE was introduced in March 2009 and the Bank of England has since injected £375 billion into the economy by purchasing bonds and gilts allowing investors to to use this capital elsewhere to achieve a higher return.

This tactic has helped to drive down gilt yields and as a result has seen annuity rates fall to historic all time lows reached in January 2013.

The Bank of England had changed it's stance on the use of QE and has said that it was no longer as effective as it was when first started. The OECD has also suggested that cutting interest rates to zero could also be considered but this strategy would not be as effective as Quantitative Easing.

 
Annuity rates may lower with stimulus
 
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How annuities rates are impacted by QE programme

Quantitative Easing involves the Bank of England (BoE) printing electronic money and using this to purchase government debt in the form of bonds and gilts from investors increasing the gilts price and thereby reducing the yield.

This allow investors to use these funds to purchase other types of investments producing a higher return and ultimately reduces the cost of borrowing for the consumer and business. It is expected that this encourages spending due to the extra money in the economy but will also increase inflation to above the BoE 2% target.

Every time the Bank of England decides to inject more money using QE gilt yields are forced lower and so pension annuity rates are also decreased.

Annuities are based on the 15-year gilt yields and this year this has increased by 31 basis points from 2.31% to 2.62%. In general this will translate to increase in annuity rates of 3.1% at some point in the future and the reverse is true if yields are decreasing. When yields are falling providers can quickly find themselves in a negative pricing cycle knowing the outcome of QE they will agressively reduce rates beyond the level needed to match yields which is to their advantage and the cost of people retiring and buying annuities.

News related stories:
Pension annuity rates threat of £175bn QE from Bank of England
Current annuity rates may increase with no QE stimulus proposed
Annuity rates likely to lower as Bank of England give QE hint
Quantitative Easing - annuity rates and pensioner income 6% lower
Related internet links:
Telegraph - Britain may need more QE says OECD
BBC - UK economy may need more stimulus
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