Whilst the majority of annuity policies taken out in the UK will offer fixed annuity rates, the rate that you are offered for your plan varies from week to week. This is because the rate that pension providers can offer you will depend on the yield from government bonds (long dated gilts) as well as other fixed investments. In fact annuity rates on average have fallen 11% in the last 12 months, and are set to fall further in 2009.
The reason why pension annuity rates in 2009 seem to have fallen is largely being blamed on the government policy of printing money, known as “quantitative easing.” The Bank of England has bought up £175 billion pounds worth of government gilts, in an attempt to pump money into the exchequer to deal with mounting debt in the public finances. However, by doing this the yield has fallen back, as the price of these government bonds has increased. Consequently, many UK pension providers cut their rates.
Aside from buying up government bonds, pension annuity providers also invest in bonds issued by companies. However, because the likelihood that corporations will default on these bonds has increased during the recession, many pension providers and insurance companies have been investing less in them, holding back money and ensuring they hoard enough capital. This has meant that they have less money to pay out to annuitants and so cut there rate accordingly. So rates for annuities in 2009 and beyond will only rise if the yield from gilts increases. This might happen if inflation starts to rise, however with depressed demand, this seems unlikely at present. The reason why inflation impacts on rates for annuities is that potential investors will want more of a return for investing in something that could be eroded in value by rising inflation.
One thing to consider though is that any rise in gilt yields and pension annuity rates could be nullified by insurance companies raising there predictions over life expectancy. And because pension annuities are becoming even more segmented in terms of enhanced rates and policies based on geographical factors, there is sure to be those who will gain and those who will lose.
