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| 8 November 2012 last updated |
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| UK annuities to stabilise with Bank of England stance on QE |
The Bank of England has decided not to extend Quantitative Easing (QE) and pensioners buying their UK annuities this year will not be subject this extra pressure on annuity rates.
Interest rates have been kept at 0.5% by the Bank of England they have decided to leave Quantitative Easing (QE) at the current level of £375 billion. This means the BoE have exhausted their previous £50 billion of QE and will refrain from purchasing gilts.
QE is a method that allows the BoE to inject money into the UK economy by purchasing gilts. As annuities are based on the 15-year gilt yields any action to buy these will increase the price and decrease the yield. As yields decrease so will annuity rates.
The programme of QE started in March 2009 as interest rates reached their record low level of 0.5% and annuities have been volatile every time the bank of England has purchased gilts.
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Pressure on annuities less but risks persist
Economists believe that the Bank of England may have abandoned the Quantitative Easing programme and will focus on the Funding for Lending Scheme (FLS) designed to provide low cost credit to business and households. This change means gilts will not be used to help the economy and annuities will avoid the pressure.
Since QE started in 2009 the 15-year gilt yields have reduced from 4.17% to 2.23% or 194 basis points. As a rough guide with would translate into a 19.4% fall in annuity rates and our benchmark example foe a male aged 65 with a fund of £100,000 has seen a greater reduction of 23.4%. Since then the income from an annuity has reduced from £7,309 pa to £5,605 pa or £1,704 pa. For a pensioner aged 65 the Office of National Statistics (ONS) expect him to live for a further 17.6 and the income he can expect from a pension annuity has reduced by £29,990 over his lifetime.
Other factors driving down gilt yields is the demand from Eurozone investors. Due to the debt crisis in Europe investors fear the risks of default on sovereign bonds and in times of uncertainty will more their funds to safe havens such as UK government bonds and gilts pushing up the price and reducing the yields. This is a risk to pensioners as lower yields will reduce annuity rates and income levels for their lifetime.
The European Central Bank (ECB) has announced that it will keep interest rates at their current level of 0.75% as the economy remains weak with no expectation of improvement as risks persist from Greece and Spain. The US fiscal cliff may also help to keep yields low so pensioners should not expect to see annuities improve in the short to medium term.
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Age |
Single |
Joint |
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55 |
£6,361 |
£5,898 |
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60 |
£6,842 |
£6,244 |
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65 |
£7,474 |
£6,843 |
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70 |
£8,405 |
£7,660 |
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£100,000 purchase, level rates, standard
Unisex rates and joint life basis |
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