16 April 2012 last updated

UK pension annuity income volatile with Spain's debt crisis

Uncertainty over Spain's debt creates fear with investors moving funds to safe havens such as UK government bonds and gilts reducing yields and annuity rates. Spain's stock market fell 3.6% to reach a three year low for the year due to investor fears that Spain will be the next European country to need a bailout as the result of the Eurozone debt crisis. As seen on 10 April 15-year gilt yields reduced significantly by 16 basis points with yields reducing to a low for the month of 2.54% as confidence suddenly eroded concerning the global economy and the Eurozone, in particular Spain. If the crisis in Spain develops it could mean pressure on annuity rates for pensioners retiring during the rest of this year and this means people retiring should be aware of this risk which could mean more volatility for annuities and uncertainty for pensioners income if gilt yields reduce.

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UK pension annuities sensitive to yield movements

Annuity rates are based primarily on the 15-year gilt yields and any change would result in providers changing annuities. They tend to be quick at reducing and often slow at increasing annuity rates although as a general rule a 16 basis point fall in gilt yields would result in a 1.6% decrease in annuities. For example a male aged 65 with a fund of £100,000 could have purchased a UK pension annuity of £6,112 pa at the beginning of April and a 1.6% decrease in annuity rates would mean a fall of £98 pa in income to £6,014 pa.

To counter falling annuity rates a pensioner willing to take slightly more risk could consider a with profits annuity or investment backed annuity and receive up to 30% higher initial incomes than the conventional open market option annuity.

If they suffer from any lifestyle medical conditions such as high blood pressure, Cholesterol, are a smoker or are overweight a higher income may be paid by enhanced annuity. For more serious health conditions such as diabetes, heart conditions or cancer incomes of 40% higher from an impaired annuity can be considered.

First quarter gross domestic product (GDP) figures for UK are out at the end of April and analysts are expecting a contraction which would indicate a technical as GDP contracted by 0.3% in the fourth quarter of 2011. Adding to the negative news was that weaker economic date from China shows grow has reduced to the slowest rate in the last three years. Markets were negative based on the the above and the FTSE-100 index has reduced by 58 points to 5,652, Europe was down by between 0.5% and 2.5% and the Dow Jones down 137 points at 12,849.

ECB assures markets over Spain's debt

The reason for the fear over Spain is that last month the European Central Bank (ECB) loans to banks were taken up primarily by Spanish banks. Their borrowings for February were 152 billion euros and for march this increased to 228 billion or 28% of all loans issued by the ECB. A further risk is that the Spanish banks are using the loans for day-to-day operations whereas most other European banks placed the loans on deposit with the ECB which indicates the stress in the Spanish banking system which will continue as the loans need to be repaid in three years time.

Spain's 10-year bonds rose to 5.9% although the ECB assured the market that there were no plans for a bailout for Spain. As long as investors remain unclear over the security of sovereign debt, funds will move to safe havens such as UK government bonds and gilts further reducing annuity rates.