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19 March 2013 last updated
Pension annuities risk with gilt yields fall as Cyprus reject bailout deal

Since the bailout deal for Cyprus targeted savers bank accounts investors have moved funds to safe havens resulting in a 15 basis point fall in UK gilt yields which could lower pension annuities if the bailout crisis continues.

The crisis in Cyprus has has seen the 15-year gilt yields reduce by 15 basis points and investors panic and as annuity rates use gilts to provide income any change will have an effect on the annuities offered.

In Cyprus the parliament has rejected the EU-IMF proposal to apply a 6.75% tax to the bank accounts of savers with less than 100,000 euros and 9.9% tax charge above this level.

To receive the bailout from the eurozone Cyprus must find 5.8 billion euros and raiding the bank accounts of savers which also include retired UK citizens. This has been supported by Germany and some creditors in order for the EU to release 10 billion euros to save Cyprus.

Pension annuities risk from Cyprus bailout deal
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Falling investor confidence forces gilt yields lower

Annuities had been rising this year with gilt yields higher as investor confidence increased with equity markets reaching five year highs based on improved economic data from the US, a fiscal cliff deal reached and the European Central Bank (ECB) pledge to do "whatever it takes" to protect and bailout member states.

Last month the 15-year gilt yields reached 2.76% with both standard and impaired annuity rates increasing. In particular impaired annuity providers had been aggressive at improving their rates and competition along with higher equity markets was making a significant difference to the income from annuities for those people that remained invested at the point they purchased their pension annuity.

Yields have now reduced to 2.41% or by 35 basis points. As a rough guide this would mean a reduction in annuity rates of 3.5% from the providers if yields do not improve. At the very least the momentum built up during this year with greater competition has evaporated and lower UK annuities can be expected.

As an example, if the providers reflected the full decrease in the rates, a person with £100,000 buying a single life, level annuity for £5,485 pa would see the income reduce £191 pa to £5,294 pa. This is unlikely to happen as standard annuity rates have been lagging behind the rise in yields so providers will not experience the immediate pressure to reduce rates.

Annuity rates at risk from economic change

The level of annuity rates are susceptible to volatility cased by economic change and the relatively good news at the beginning of the year has seen rates rise. In the last month uncertainty in the US with the Federal Reserve comments about the risk of their stimulus package sent yields 9 basis points lower followed by the outcome of the $85 billion of US tax cuts reduced yields a further 21 basis points by the beginning of the month.

After some gains the Cyprus crisis alerted investors to the risks if the eurozone could raid the bank accounts of other member states such as Spain and Italy undermining the ECB pledge which has been protecting the bond market leading to a 15 basis point fall in yields.

For people retiring now it may take up to four weeks to transfer their funds by an open market option. There is a higher risk that when this happens the annuity rate they receive will be lower than expected if yields continue to fall as standard annuities are only guaranteed for 21 days although most enhanced annuity providers offer 28 to 45 day guarantees.

News related stories:
Buying annuities made safer as 15-year gilt yields recover
Best annuity income and markets fall 1.6% after US Fed stimulus fears
Enhanced annuities providers decrease rates by 1.2% as gilt yields fall
Best annuities threat as eurozone debt crisis grips markets
Related internet links:
Guardian - Cyprus rejects bailout deal leaving eurozone in crisis
Telegraph - Cyprus rescue in chaos as bank levy rejected
BBC - Cyprus MPs reject bailout tax on bank depositors
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