2 August 2012 last updated

Annuity rates could fall again as 15-year gilt yields at all time low

At 2.02% the 15-year gilt yields have reduced their lowest ever level after the ECB failed to impress investors of the measures to be taken to protect the euro. Gilt yields fell to their lowest ever levels with the 15-year gilt yield reducing to 2.02% down 7 basis points and this may have implications for annuity rates. Annuities are primarily based on gilt yields and in general a 7 basis point reduction in the gilt yield would mean a 0.7% decrease in annuity rates. As annuities have not fully reflected the reduction in yields from last month the decrease is more likely to be close to 2% for standard annuity rates if yields do not improve. After a slight bounce in gilt yields yesterday the European Central Bank (ECB) president Mario Draghi disappointed both markets and investors after his statement to do "whatever it takes" to support the euro.

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ECB disappoints investors

The ECB had stated that it would re-introduce the Securities Market Programme (SMP) where the ECB would buy government bonds from financial institutions, however, Mario Draghi failed to present any concrete details concerning the plan or when it may start.

As a result equity markets declined with the FTSE-100 index down 50 points at 5,662 , the Dow Jones down 92 points at 12,878 with Spain and Italy lower by 5%. Investors were also disappointed with funds moving away from Europe to the safety of other jurisdictions such as UK government bonds and gilts increasing the price and reducing yields. After the ECB announcement the cost of Spain's 10-year bonds immediately increased from 6.6% to over 7% with Italy's 10-year bonds up from 5.7% to 6.2%.

As Germany is concerned of the risks in supporting the debts of countries in the long term the plan of the ECB is to purchased vast quantities of shorter dated two and three year bonds from banks and financial institutions. The markets are unsure about the ECB's power to implement their plans and this is resulting in a great deal of volatility for equities and gilt yields in the UK, both of which affect the income pensioners will receive in their retirement.

As many pensioners remain in equities right up to the time they purchase their pension annuity, volatility can easily reduce the fund size and gilt yields can easily reduce the annuity rates. The combination of these often magnify the losses for pensioners at retirement and as annuities cannot be changed once purchase, this would result in a lower income for a pensioners lifetime.