Annuity Rates Up as Gilt Yields Rise on Government Borrowing Plans

Rachel Reeve’s first Budget as Chancellor has left businesses reeling but equally concerns are now hitting home in the bond/gilt market on government borrowing plans.

Mrs Reeve’s Budget contained details to change the government’s fiscal rules on borrowing to allow her to borrow more to invest more.

• For example: changing Student Loans from a debt (a liability risk if not loans are not repaid) in the government’s books to an asset (i.e., this is money that is owed).

Changes such as these will allow the British government to borrow more as the ‘balance sheet’ (assets less liabilities) will look healthier.

Comment – Impact of More Borrowing

The government borrowing even more has pushed government borrowing interest rates (Gilt Yields) up.  This means:

• Capital values of gilt/bond/fixed interest funds have fallen.  If you hold a £100 gilt paying 4% pa (£4 pa) and yields rise to 5%, your £100 gilt will fall in value to £80 as an £80 gilt still paying 4% (face value £100) means a return of 5% pa to match the new, higher gilt yield.
• This is then countered by a fall in Bank of England interest rates this week.  This means gilt yield expectations fall let’s say from 5% pa to 4.5% pa meaning the capital value of gilts rises and therefore gilt/bond/fixed interest funds recover a little.
• Higher gilt yields mean higher annuity rates i.e., bigger pension income opportunities. 
• Have you ever wondered how pension companies guarantee your pension payments?  Pension companies lend your pension fund to the government and with higher gilt yields, the pension company gets a higher, guaranteed income meaning they can offer you a bigger annuity.