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7 March 2013 last updated
Annuity rates boost as Bank of England rejects more stimulus

Annuity rates prospects were given a boost as the Bank of England rejects the need for more Quantitative Easing deciding not to increase the current level of funding from £375 billion with gilt yields increasing which will help annuities higher.

The Bank of England's
Monetary Policy Committee (MPC) has decided not to increase Quantitative Easing (QE) by another £25 billion and the current amount of the programme stands at £375 billion.

UK annuity rates are primarily based on the 15-year gilt yields and more QE would result in the Bank of England buying gilts which increases the price and decreases the yield. Lower yields will force providers to decrease retirement annuities.

The MPC decided that as the service sector was strong and yields had decreased significantly already this month it was not necessary to inject a further £25 billion of stimulus.

Annuity rates boost stimulus rejected
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Risk to annuities from Quantitative Easing

The Bank of England (BoE) uses Quantitative Easing to stimulate the economy by printing electronic money to buy government debt such as bonds and gilts from institutional investors. The gilts price rises and the yields fall allowing investors to use these available funds to purchase other investments with higher returns.

This tends to reduce the cost of borrowing for consumers and business although it also increases inflation and the BoE target is currently 2%. This may change with the arrival of Mark Carney in July this year to take over as the Governor of the Bank of England.

Falling gilt yields will decrease pension annuity rates and since march 2009 when QE was started £375 billion has been injected into the economy. The last time it was used was July 2011 with £50 billion with yields falling 42 basis points that month alone. As a general rule a fall of this size would mean annuity rates reducing by 4.2%.

Annuity rates fallen further than gilt yields

With the announcement from the BoE yields have increased 5 basis points today. Since the last round of QE the 15-year gilt yields are 141 basis points lower having reduced from from 3.98% to 2.57%. The all time low was in August 2012 of 2.02% and they have since recovered. Retirement annuities should be approximately 14.1% lower compared to yields and based on our benchmark example od a male aged 65 with a fund of £100,000 the rates are 19.4% lower.

Part of this lower figure would included an adjustment for the EU Gender Directive where male rates were reduced by about 3.6%. After taking this into account annuities are still lower than where they should be by about 1.7%.

People retiring now and buying annuities can ignore the QE threat in the short term although it is likely to return in the second quarter with the arrival of Mark Carney. There is already discussions about giving the Bank of England more freedom and this could mean more Quantitative Easing, possibly as much as £175 billion as explained by David Miles of the Bank of England as part of their asset purchasing model to stimulate a struggling UK economy.

It the asset purchasing model is used people retiring from the second quarter onwards would find UK annuity rates falling to new all time lows.

How to counter lower pension annuity income

A strategy to counter falling pension annuities for people in good health would be to consider a with profits annuity or investment backed annuity that could increase the initial income by 30%. This annuity is suitable for individuals with other private pensions or final salary schemes as there is slightly more risk than the income from conventional open market option annuities.

Where a person medical conditions such as diabetes, heart conditions or cancer an impaired annuity could add up to 40% more income and even lifestyle medical conditions such as high blood pressure, Cholesterol, smoking or being overweight could add about 18% more income could be offered from an enhanced annuity.

News related stories:
Pension annuity rates threat of £175bn QE from Bank of England
Current annuity rates increase possible with no QE stimulus proposed
Annuity rates likely to lower as Bank of England gives QE hint
UK annuities to stabilise with Bank of England stance on QE
Annuity rates could remain at current levels with no more QE
UK annuity rates may lower as QE expected after falling inflation
Related internet links:
BBC - Bank of England rejects more stimulus
Telegraph - Bank of England holds interest rates and QE
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