The Bank of England is believed to be considering announcing an extension to its Asset Purchase Programme (Quantitative Easing – QE) this Thursday.  What will this do to annuity rates?

All other things being equal, lower long term yields from Gilts and corporate bonds will feed through into lower annuity rates so any announcement of further QE is likely to bad news for pension investors reaching retirement in 2012.

Tom McPhail, Head of Pensions Research, Hargreaves Lansdown comments:

‘If you are planning to buy an annuity this year then it may well make sense to get on with it as all the immediate pressure on rates is downward. In the longer term we may see rates recover but there is no telling by how much or how long we might have to wait.’

‘If investors want to stand any chance of getting the best retirement income terms for themselves then it is imperative that they shop around in the run up to retirement.’

When QE was first announced in March 2009 (vertical line on graph below) there was an immediate short term drop in Gilt yields, however they swiftly recovered and in the longer term context, the more significant driver can be seen to be the Euopean debt crisis which acclerated through 2011, driving investors towards the perceived safe haven of UK government debt.

Similarly the chart shows that the decline in annuity rates had already set in ahead of QE in 2009 as insurers adjusted their risk outlook following the 2008 meltdown.

Gilt Yields and Corporate Bond Yields are plotted on the left hand scale, annuity rates are plotted against the right hand scale. Gilts are 15year yields, Bonds are 15 year investment grade corporates, Annuity rate is a level annuity for a 65 year old man with a 5 year guarantee.

Annuity investors have seen rates plummet in recent years, for example a 65 year old man with £100,000 could have bought a level income of £7,855 in July 2008; today someone in the same situation would only get an income of £5,923 – a drop of just under 25%.

What happens next? There exists the outside possibility that the economic outlook and market sentiment could change radically, driving Gilt yields and annuity rates back up again. Unless this happens, the combined effect of QE, European regulation (Solvency 2), uncertainty caused by unisex pricing and on-going life expectancy improvements are all likely to keep pushing rates down through 2012.

0 comments 0 people listening

Sign in

• Comment help
• Get Livefyre

Post comment as

+ Follow conversation Following - Unfollow

Post to

Sort: Newest | Oldest