We have a bit of a dilemma in the annuity market at the moment, with a big question looming: Will the Government’s £220Bn gilt spree bring volatility to annuity rates? According to one leading annuity provider, LV=, the Government’s issue of £220bn in extra gilts probably will lead to volatility in annuity rates for some time to come.
Their head of annuities, Matt Trott, says the price of gilts reduced in response to the Budget move, and he therefore suggests that gilt yields could rise, which could lead to an improvement in annuity rates, but this depends on the relationship between the Government and the Bank of England. Certainly we will have to keep a close eye on annuity quotes.
The two different bodies are doing different things, with the Bank of England using quantitative easing to buy up gilts, and there is therefore likely to be volatility in the annuity market for some time. It all really depends on how the two bodies talk to each other across the Square Mile (financial district in London) and how the new gilts that are issued match with the gilts that the Bank of England is buying. Future compilation of annuity tables could be quite complicated.
There are two different thoughts on this. One is deflationary, and the other inflationary. In respect of the former, if the Government has issued extra gilts as part of quantitative easing, the issuance of even more gilts is part of this process and will ultimately lead us to higher inflation. Longer-term gilts will rise over time, so annuity rates will rise, subject to longevity.
