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7 July 2017 last updated

Pension annuities set to rise as central banks signal end to cheap money

Pension annuity rates are set to rise as the European Central Bank signals the end of cheap money with the QE programme sending the 15-year gilt yields 33 basis points higher in the month.

Investors have reached to comments made by the European Central Bank (ECB) President Mario Draghi stating the factors suppressing inflation are short term implying the quantitative easing (QE) programme would be stopped by the end of the year.

The €1.1 trillion has been used to buy bonds making available cheap money to investors and sending the 15-year gilt yields lower from 3.05% in July 2014 to 1.80% in January 2015.

Over the past week investors have been selling bonds and gilts sending the price lower and yields have re coved 33 basis points from a recent low in mid June of 1.35% to 1.68% in early July.

Annuity rates primarily based on gilt yields and have been rising recently before the ECB statement although a 33 basis point rise would result in a 3.3% rise in annuities.

Pension annuities set to rise
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Annuity income already improving

Income from pension annuities have already improved from the low for the year and have recovered the falls earlier in the year.

  Benchmark annuity rates and gilt yields
  Jan Feb Mar Apr May Jun Jul
Rate £5,394 £5,246 £5,187 £5,108 £5,272 £5,433 £5,433
Yield 1.79% 1.50% 1.49% 1.46% 1.43% 1.62% 1.68%

The above table shows 15-year gilt yields are higher by 33 basis points and for our benchmark example of a 65 year old buying a single life, level annuity with a fund of £100,000 the income has increased from £5,272 pa at the end of May to £5,433 pa at the end of June or a rise of 3.0%.

Annuities have improved since reaching a low for the year in April of £5,108 pa for our benchmark example and is now £325 pa higher.

In terms of lifetime income, the Office of National Statistics (ONS) would expect a male to live for 17.3 years and he will have £5,622 more over his lifetime. For a female she can expected to live for 20.4 years increasing her lifetime income by £6,630.

European growth prospects improve

The ECB is increasingly confident with growth prospects for the Europe economy and would consider higher interest rates which have also been suggested by Mark Carney, Governor of the Bank of England.

However, it is unclear whether all this means there are opportunities to scale back quantitative easing or simply make adjustments to parameters while leaving the policy stance unchanged.

Investors are particularly sensitive to any suggestion of easing monetary policy following the Federal Reserve in 2013 ending their QE programme resulting in a dramatic bond sell-off and the 15-year gilt yields rising from a low of 2.04% in mid 2012 to a high of 3.42% by October 2013.

For annuities the recent rise in yields is unlikely to continue as the ECB will be more careful in the language they use when stating the position of the QE programme although it is a welcome boost for people retiring in the short term to gain some extra income from the very low annuity rates.

News related stories:
Pension annuity rates to reduce as ECB starts €1.1 trillion stimulus
Best annuities to benefit if US Federal Reserve tapers stimulus
Related internet links:
FT - End of cheap money leave bankers lost for words
MarketWatch - Global bonds sell off with end of easy money
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