The UK’s 10‑year gilt yield has climbed to 4.736%, up from 4.637% a year ago – a shift that is simultaneously squeezing the government’s finances while offering a welcome boost to retirees.
As one adviser put it in comments supplied to the Money blog, this is “super news for those retiring on pension income”, even if it spells trouble for the Treasury.
Wait, what are gilt yields?
Gilts are government bonds issued by the Treasury to help fund public spending, and they’re traded on the stock market.
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When you buy a gilt, you’re effectively lending money to the government. In return, you get regular interest payments and your original investment back when the bond reaches its maturity date. That date depends on the type of gilt – some last just a year, while others can run for 30 years or even longer.
Bad news for the government
Higher gilt yields push up the cost of government borrowing, limiting the chancellor’s room for tax cuts or new spending.
As Anita Wright, of Ribble Wealth Management, explains: “When gilt yields rise, the government must refinance existing debt and issue new borrowing at higher interest rates… even modest increases translate into materially higher annual debt‑servicing costs.”
Steven Greenall, mortgage and protection adviser at Rayleigh-based Protect & Lend, goes further, calling it “awful news for the government”, noting that “every 0.1% increase… can increase the interest bill by almost £2bn per year”.
Good news for those buying an annuity
For pensioners, the picture looks far brighter. Because annuities are priced off gilt yields, rising yields can significantly improve retirement income.
“If annuity rates increase, the same pension pot can buy a higher level of secure income than before,” says Wright.
People further away from retirement are less likely to benefit. Pic: iStock
Rob Mansfield, independent financial adviser at Tonbridge-based Rootes Wealth Management, adds that combining stronger rates with a medically underwritten annuity “can be a winner for those looking for long‑term retirement income”.
As ever, it’s important to stress there are pros and cons to buying an annuity – if you’re thinking of going down this route, take independent financial advice.
Bad news for those further away from retirement…
Rising gilt yields mean falling bond prices – and those further away from retirement could have their pension pot heavily invested in bonds.
So, the value of your pension could be dragged down in the short term. Younger savers usually recover over time, but anyone nearing retirement who hasn’t de‑risked could see an unwelcome dip.
…and other borrowers
Simon Bridgland, broker at Canterbury-based Charwin Private Clients, says it isn’t all positive: “Whilst this is super news for those retiring on pension income, it is the polar opposite for those in need of products such as lifetime mortgages… as this just translates to longer-term pain from higher interest rates.”
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…and self-invested personal pensions
While an annuity sets a return based on interest rates ultimately determined on bond markets, SIPPs are typically more weighted to equities, with returns dependent on stock market performance.
The volatility in global markets may leave imminent retirees looking at lower returns.
Gold prices
The ripple effects extend beyond pensions and public debt. Cameron Parry of TallyMoney notes that rising yields often trigger “a quiet flight to safety”, boosting demand for gold as investors seek assets “not tied to government borrowing or central bank policy”.