The Investment Column: Low bond yields affect us all

Low bond yields affect us all

Bonds yields rarely take centre stage in the reporting of financial markets. This week they have emerged from obscurity by hitting their lowest level for more than a decade. So what do these rock bottom yields mean for the average investor?

A close look reveals some unsettling consequences, and not just for active investors. Anyone with a pension, and most of those with an endowment savings plan, will be affected.

At first glance the figures seem innocuous enough. The 15-year variety of UK government gilts yesterday yielded 6.26 per cent - against 7.77 per cent a year ago, a fall of a mere 1.51 percentage points.

However, for anyone buying an annuity now, it makes a difference of thousands of pounds in annual income. Because annuities give a guaranteed income until death, they must be backed by fixed-interest products such as gilts. When gilt yields go down, the price of gilts is almost certainly going up, costing annuity providers substantially more to give the same level of income.

That cost is, of course, passed on. A 55-year-old man who paid an annuity provider pounds 250,000 yesterday would get an income of pounds 19,707 a year. The same sum a year ago would have bought pounds 22,793, according to figures form the Annuity Bureau, a specialist annuity adviser. In other words annuities are providing 14 per cent a year less in income because of the fall in bond yields. The rule of thumb is that for every fall of 1 percentage point in gilt yields, a pension saver needs 10 per cent more capital for the same retirement income.

Owners of endowment policies may also be concerned at low bond yields. The growth of endowment savings depends crucially on the bonus paid out by the life office which sells the endowment.

Actuaries, the life office gurus who decide how much the bonus should be, split it between an annual bonus, which is guaranteed to be paid, and a terminal bonus, which is not guaranteed and is only paid at maturity. The less actuaries expect from investments, such as bonds, the less they guarantee to pay.

Even the best-paying life offices are now promising just 8 per cent every year - and this will probably get lower. For investors who bought endowment mortgages in the hope of returns of 12 per cent a year, payments may well need an urgent review. That will avert a nasty surprise when the mortgage falls due.

The drop in bond yields is attributed by most observers not to current events but to long-term economic factors. The Government's decision to stand firm on meeting the Maastricht criteria for monetary union has led brokers to expect low long-term interest rates, which makes even a bond yield of 6.25 per cent attractive.

So ironically, Labour's European policy is doing much more to push up the cost of pensions than the Budget cuts in dividend tax relief.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

Where the spooks get their coffee fix: The busiest Starbucks in the US is also the most secretive

The secret CIA Starbucks

The coffee shop is deep inside the agency's forested Virginia compound
Revealed: How the Establishment closed ranks over fallout from Loch Ness Monster 'sighting'

How the Establishment closed ranks over fallout from Nessie 'sighting'

The Natural History Museum's chief scientist was dismissed for declaring he had found the monster
One million Britons using food banks, according to Trussell Trust

One million Britons using food banks

Huge surge in number of families dependent on emergency food aid
Excavation at Italian cafe to fix rising damp unearths 2,500 years of history in 3,000 amazing objects

2,500 years of history in 3,000 amazing objects

Excavation at Italian cafe to fix rising damp unearths trove
The Hubble Space Telescope's amazing journey, 25 years on

The Hubble Space Telescope's amazing journey 25 years on

The space telescope was seen as a costly flop on its first release
Did Conservative peer Lord Ashcroft quit the House of Lords to become a non-dom?

Did Lord Ashcroft quit the House of Lords to become a non-dom?

A document seen by The Independent shows that a week after he resigned from the Lords he sold 350,000 shares in an American company - netting him $11.2m
Apple's ethnic emojis are being used to make racist comments on social media

Ethnic emojis used in racist comments

They were intended to promote harmony, but have achieved the opposite
Sir Kenneth Branagh interview: 'My bones are in the theatre'

Sir Kenneth Branagh: 'My bones are in the theatre'

The actor-turned-director’s new company will stage five plays from October – including works by Shakespeare and John Osborne
The sloth is now the face (and furry body) of three big advertising campaigns

The sloth is the face of three ad campaigns

Priya Elan discovers why slow and sleepy wins the race for brands in need of a new image
How to run a restaurant: As two newbies discovered, there's more to it than good food

How to run a restaurant

As two newbies discovered, there's more to it than good food
Record Store Day: Remembering an era when buying and selling discs were labours of love

Record Store Day: The vinyl countdown

For Lois Pryce, working in a record shop was a dream job - until the bean counters ruined it
Usher, Mary J Blige and Will.i.am to give free concert as part of the Global Poverty Project

Mary J Blige and Will.i.am to give free concert

The concert in Washington is part of the Global Citizen project, which aims to encourage young people to donate to charity
10 best tote bags

Accessorise with a stylish shopper this spring: 10 best tote bags

We find carriers with room for all your essentials (and a bit more)
Paul Scholes column: I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England

Paul Scholes column

I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England
Jessica Ennis-Hill: 'I just want to give it my best shot'

Jessica Ennis-Hill: 'I just want to give it my best shot'

The heptathlete has gone from the toast of the nation to being a sleep-deprived mum - but she’s ready to compete again. She just doesn't know how well she'll do...