Rising gilt yields are a headache for Rachel Reeves as they push up the cost of government borrowing (Image: Getty)
Rising gilt yields spell “good news” for retirees planning to secure an annuity, an expert has said. The 10 year gilt yield has risen by some 0.85 percentage points since the US and Israel attacked Iran on February 28. That put gilts on course for their worst month since Liz Truss’s “mini” budget in September 2022.
Gilt yield rises indicate falling bond prices, meaning higher Government borrowing costs. While Government finances get squeezed, the shift can actually boost some retirees’ pension pots. The yield on 10-year gilts touched 5.09% on Monday (March 23), but ended the day at 4.91%.
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When you buy a gilt, you lend money to the Government, receiving a regular interest payment and the original investment when the bond matures.
While rising yields are bad news for Government, they can boost retirement income significantly for those with annuities, which are priced from gilt yields.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said rising yields spell “good news” for those already in retirement who want to secure an annuity.
She said: “Long-term gilt yields are a key factor in the pricing of annuity incomes and so when they rise, annuity incomes will often rise too.”
Ms Morrissey added: “Annuities have undergone a real resurgence in popularity in recent years off the back of rising incomes, with values hovering around all-time highs.”
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She explained data from HL’s annuity search engine shows a 65-year-old with £100,000 pension pot can get up to £7,712 per year from a single life level annuity with a five-year guarantee.
Rebecca O’Connor from Pension Bee explained that annuity rates are benchmarked to 15-year gilt yields – the main investment for annuity providers.
She said: “Broadly speaking, annuity rates follow the same trajectory as interest rates. This means that people considering taking out an annuity with some or all of their pension pot may benefit from a higher income when gilt yields rise.”
While rising yields may benefit some retirees, the news may be less appealing for pensioners with defined-contribution pensions, as the impact of rising gilt yields on bond prices may affect pension values.
Ms Morrissey said this is particularly the case if you are approaching retirement and have invested in a life-styling fund that aims to de-risk your portfolio by selling down equities and buying bonds.
She added: “If you are in a lifestyle fund, check whether it aligns with what you want to do in retirement.
“For instance, if you want to remain invested through income drawdown, then you may want more equity exposure to support returns. If you need any support with this decision, you can seek financial advice.”
For anyone with years to go before they retire, Ms Morrissey said: “It’s important to take a long-term approach to pension saving and not take knee-jerk reactions to market volatility.
“Pensions are a multi-decade investment journey, and volatility is a normal part of investing. Over time, markets do tend to recover, and the bumps in the road are smoothed.”