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6 September 2012 last updated
UK annuity rates can increase with ECB bond buying plan

UK annuity rates could increase as investors move fund back to Europe as the ECB reveals their plans to buy sovereign debt of struggling countries.

The announcement today by Mario Draghi that the European Central Bank (ECB) will start their bond-buying plan will give confidence to investors that member states in need of a bailout will have support.

This is a critical component for the Eurozone as recent 10-year bond yields have increased to beyond the unsustainable 7% level for Spain at which point a bailout would be required.

This security offered by the ECB means that the cost of borrowing for Spain and Italy will reduce and investors are likely to move funds away from UK government bonds and gilts to European bonds offering higher yields. As gilt yields increase in the UK pensioners will benefit from pension annuity rates improving although there is still uncertainty over economic recovery.

 
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How the ECB plan will work

The European Central Bank will introduce a scheme called the Outright Monetary Transactions (OMT) in conjunction with the European Stability Mechanism (ESM) and countries will have to request a bailout before the ECB will act. There will be no limit to the amount of bonds purchased dated from one to three years and is designed to reduce the borrowing cost of the debt laden country to more affordable levels.

Already Spain has benefited from the ECB plan being announced with 10-year bond yields reducing to under 6% and new bond auctions of four-year bonds experienced reduced yields from 5.9% to 4.6%. One risk of the new measures is that failing countries could abandon unpopular attempts of financial reform and austerity in faviour of unlimited funding from the European Central Bank and this would undermine long term recovery for Europe.

Benefits for pensioner UK annuity rates

As investors confidence returns to Europe funds will be moved from the safe haven of low yielding UK government bonds and gilts to high yielding European bonds such as for Spain and Italy, as the ECB will guarantee this sovereign debt.

UK annuity rates are based on the 15-year gilt yields which have increased today by 8 basis points to 2.15%. As a general rule an 8 basis point increase in yields will translate to a 0.8% rise in annuities and as more investor funds seek higher yields in Europe the price of UK gilts will fall thereby increasing the yield to the benefit of UK annuity rates and pensioner income. See Annuity Rates Review for the latest updates.

Equity markets were positive about the plan with the FTSE-100 index was 119 points higher at 5,777, the Dow Jones 244 points higher at 13,292 and Europe was up between 2.2% to 4.9%. In the short term UK pensioners will benefit with the combined increases in equities and higher UK annuity rates although annuities remain at their lowest levels ever recorded and will not recover even to levels a year ago.

News related stories:
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News related stories:
BBC - ECB's unveils bon buying euro debt plan
Guardian - Draghi plan to buy struggling countries bond's
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