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23 July 2012 last updated |
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Impaired annuity rates react and fall on bailout for Spain |
Impaired annuity rates decrease as providers see no short term improvement in Spain's debt crisis as talks seek 300 billion bailout.
Fear of Spain needing a bailout for 300 billion euro and a worsening situation developing has convinced some providers of UK annuities it is time to reduce their rates.
Providers have resisted reducing their annuity rates in line with the falling 15-year gilt yields but today impaired annuity providers Aviva and Just Retirement have reduced their rates by between 0.75% and 1.0%.
This follows other falls in smoker pension annuities on 12 July with falls of about 0.5% across the board.
So far this month gilt yields have reduced from 2.29% to 2.05% representing a reduction of 24 basis points and this roughly means annuity rates will decrease by 2.4% at some point in the future.
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Annuity rates fall as debt crisis deepens
Providers will not immediately change pension annuity rates if gilt yields fall as there are other considerations such as business targets and market share as well as economic factors of the likely medium term level of gilts. As the situation in the Eurozone deteriorates and Spain's debt position becomes clear the providers are reflecting the expectation and level of yields in the future and reducing annuity rates now.
For pensioners this is a difficult time as annuity rates are only guaranteed for a fixed period of time such as 14 days or 30 days and in that time the funds need to be transferred. If there are any delays it is likely that new lower rates will apply to their fund which will reduce the income they will receive. In addition
equity markets have also reduced with the FTSE-100 index down 118 points or 2% lower at 5,534, the Dow Jones 101 points lower at 12,721 and European markets lower by between 1% to 5% for the Madrid stock market.
Spain's 10-year bond yields have increased to a high of 7.59%, well above the 7% level where a bailout is considered necessary. The rising cost of borrowing is an indication that investors have lost confidence with Spain's ability to manage their debt crisis and it seems more likely that a sovereign bailout od Spain will be necessary.
The 15-year gilt yields have not reduced today and remain at 2.05%, however, as annuity rates are lagging behind it is likely that rates will decrease if the Eurozone crisis is escalated to another level during the rest of the month.
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Age |
Single |
Joint |
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55 |
£6,132 |
£5,784 |
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60 |
£6,532 |
£6,234 |
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65 |
£7,247 |
£6,808 |
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70 |
£8,170 |
£7,616 |
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