6 July 2012 last updated

Current annuity rates threatened as gilt yields decrease

Rapid fall in the 15-year gilt yields as investors move funds to safe havens threatens to reduce current annuity rates. The latest decrease in gilt yields from a high of 2.31% just three days ago to 2.18% today signifies a shift in the future direction for pension annuity rates compared to a week ago. The 15-year gilt yields reduced by 5 basis points today to 2.18%. Last week a deal was reached between Germany, Spain and Italy where banks with financial problems would be funded directly from the European bailout fund called the European Stability Mechanism (ESM). This resulted in the 15-year gilt yields increasing by 11 basis points with possible short term increases of up to 3% for current annuity rates. The current position has quickly changed with uncertainty returning to the markets and falls of up to 3% in Europe, the Dow Jones index was down 124 points at 12,772 and the FTSE-100 index down 30 at 5,662.

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Investors move to safe havens

Investors have been withdrawing funds from Europe and investing in safer havens such as UK government bonds and gilts. Investors are particularly worried that Spain's borrowing costs for 10 year bonds have reached the unsustainable level of 7%. At this yield it is generally understood that governments would need to consider a bailout and has been attained despite an agreement securing 100 billion euros for Spanish banks in addition to the Eurozone bank debt deal for future bank funding.

There is further concern for the global economy as the head of the International Monetary Fund (IMF) Christine Lagarde is expected to announce later this month a lower economic growth forecast down from the 3.5% figure in April. Although the IMF have praised the the Eurozone for taking steps to solve the debt crisis, however, this has not calmed investors with Spanish ten year bonds rising from 5.8% after the bank debt deal to almost 7% ahead of the Eurozone Summit on Monday 9 July.

It is likely that UK gilt yields will continue to fall threatening current annuity rates further until investors see more action from EU leaders to resolve the debts of Spain and Italy and at least in the short term annuity rates will not increase and are expected to decrease slightly. Currently it is expected that standard annuities will decrease by 0.7% and smoker and impaired annuity rates by 0.5% assuming gilt yields remain at 2.18%. See Annuity Rates Review for the latest updates.