5 July 2012 last updated

Annuity rates under threat as Bank of England injects £50 billion of QE

With another round of £50bn Quantitative Easing annuity rates are likely to reduce when gilt yields fall this month. The Bank of England is to inject another £50 billion into the economy using Quantitative Easing (QE) bring the total to £375 billion. The likely effect of this will be to increase the price of gilts and reduce the yield and as annuity rates are based primarily on the 15-year gilt yields it is likely that annuities will fall over time. The European Central Bank (ECB) has cut interest rates from 1.0% to 0.75% and reduced the rate banks can receive on overnight deposits with the ECB from 0.25% to zero. With the economy in a double dip recession and no signs of growth, the fall in inflation and the Eurozone debt crisis the Bank of England is pessimistic about the immediate future. The measures taken today may be one of a series to help stimulate the economy.

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QE will reduce annuity rates further

Gilt yields reduced today with the 15-year gilt yields down 5 basis points at 2.23%. Apart from pensioners retiring and purchasing their annuities final salary pension scheme will also suffer with further quantitative easing. For these schemes the funding levels are based on the yields to provide future pension income paid by the scheme and as yields fall so the funding required increases. This means that in the short term schemes operate with a deficit which has increased to over £200 billion in 2012.

Pensioners retiring today should be prepared for lowering annuity rates as Quantitative Easing is applied although providers may not lower their rates immediately. Gilt yields are likely to be volatile in the short term and if the Bank of England have a series of QE measures this year annuity rates are likely to be affected significantly towards the end of the year. The other threats to annuities will be Unisex rates and Solvency 2.

With Unisex rates males will see their income fall by as much as 6% although in theory females should expect a rise, this may not be significant as providers may start to close the gap before the end of the year. Solvency 2 is more complex with providers required to provide greater resources against corporate bond defaults and the effect may reduce annuity rates by up to 8%. These European measures coupled with QE can only help to push annuity rates lower by the end of 2012.