At Last – Good News for Pensioners

24th April 2012

Gilts have suffered recently with the QE measures the government have been using to inflate the economy. However, last week rebounding gilt yields pushed up the value of the pensions they can secure for the first time since 2010.

The falling yields in gilts have resulted in record lows in annuity rates over the past two years;. An annuity is the amount of retirement income that can be bought using a pension fund. At the same time, the income that can be taken using “capped drawdown” from a pension fund – rather than buying an annuity contract – has been cut by up to 50 per cent.

This bleak outlook for retirees was largely caused by falling yields on government bonds, or gilts, which are used by insurers to set their annuity rates.

Gilt yields are also used by the Government Actuary’s Department to set annual drawdown limits – along with factors such as age and pension fund size.

Earlier this year, yields on 15-year gilts fell to an all-time low of 2.25 per cent but yields have now started to rise again, reaching just under 3 per cent in the middle of March, and reflecting growing economic optimism.

The rate for a 65-year-old man with a £100,000 pension fund has risen from £5.86 of income per £100 in February to £5.88 per £100 in March.

However some suppliers will be cautious about increasing the annuity rates as if the increase was followed by a fall, they would be exposed as they have to guarantee their annuity rates.

It is likely that there will be a small amount of increase but any substantial rise will be later rather than sooner.

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