Diversification is shielding annuities from the falls in gilt prices, fortunately. Pension annuity rates offered by providers competing in the open market will escape from large falls caused by falling gilt yields due to the diversification in their portfolios, according to experts.
Gilt yields have fallen to historic lows largely because of the impact of quantitative easing (QE) which the government started last week, but annuity quotes from annuity providers Aegon, Prudential, Legal & General and Aviva will escape most of these large reductions. Amongst competitive annuity rates in the open market, the link with gilt yields is nowhere near as strong as it used to be, again, according to experts. Further, for a number of the major annuity providers, gilts make up less than 20% of the portfolio. At one point in 2008, Aegon had no gilt exposure at all, it has been claimed.
However, it is being suggested that a spread will emerge between the more popular types of annuity contracts and those provided by firms not competing in the open market, where the portfolios have a much higher exposures to gilts.
But, pension annuities backed by diversified portfolios will also take a hit if the Bank of England’s QE plan succeeds and money is shifted into corporate bonds and their yields then fall.
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