20 July 2012 last updated

Best annuity rates decrease possible with Spain's debt crisis

Fear over Spain's sovereign debt has pushed yields on 10-year bonds above the 7% level as investors move funds to safe havens which could result in the best annuity rates decreasing. Even though Eurozone finance ministers have approved a 100 billion euro loan to Spanish banks investors fear the true extend of Spain's debt crisis with the cost of 10-year bonds in their latest auction rising 27 basis points to 7.25%. This is above the 7% level though to be unsustainable in the long term and an indication of a possible bailout such as with as Ireland, Greece and Portugal. Fear that the Eurozone cannot gain control of the debt crisis will drive investors to seek safe havens such as German bund's or UK government bonds and gilts until they can be confident the crisis is under control. As a result lower gilt yields will force providers to reduce the best annuity rates which means lower income for UK pensioners.

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Lower annuity rates for UK pensioners

For UK pensioners as the price of the gilts increase the yield decreases and as the best annuity rates are based on the 15-year gilt yields a fall in the yields will result in lower annuity rates.

Providers of pension annuities may not immediately reduce annuity rates after gilt yields have decreased although a continued decline of yields will drive annuity rates lower over a four week period. The 15-year gilt yields have reduced by 4 basis points to 2.05% and for the month of July these have reduced by 24 basis points. Over time this will result in a 2.4% reduction in annuity rates and part of this has been reflected in smoker and impaired annuities with reductions of about 1%. For the latest updates see Annuity Rates Review.

To recover the falls in annuities pensioners may consider an investment backed with profits annuity that would pay income 30% higher than a conventional annuity. As the fund is invested the income could go down in the future although this is smoothed by the provider which significantly reduces volatility. Pensioners would need to accept this slightly higher risk and should have other income sources from pensions and savings.

Others opportunities for a higher income than the open market option standard annuity is an enhanced annuity if the pensioner suffers from lifestyle medical conditions such as high blood pressure, Cholesterol, smoking or is overweight. Incomes of 40% or higher could be offered with an impaired annuity for serious conditions such as such as diabetes, heart conditions or cancer.

Spainish debts may never be repaid

Spain's crisis has been compounded with recent data showing that their banks have debts of 155 billion euros that may never be repaid which exceeds the recently approved Eurozone bank loan. The actual amount the Spanish banks require will not be know until a report is published in September 2012. In addition the regions of Spain such as Valencia could need a bailout from Madrid and the government are setting-up an 18 billion euro fund for all regions. Equity markets are lower with Spain's Ibex index down 5.8% and other European markets down 1% to 2% with the FTSE-100 index lower by 62 points at 5,652 and the Dow Jones 121 points lower at 12,822.

After reaching a recent low of 5,266 on 23 May the FTSE-100 index had been around the 5,600 despite the volatility and negative news surrounding the UK economy and Eurozone. For pensioners that remain in equities and are retiring now to purchase their annuities they should consider converting the fund to cash to avoid a sudden fall in the value. It can take up to four weeks before their funds are transferred and a decrease in the pension fund would mean the pension income for the lifetime of the annuity will also be lower by the same decrease.