The UK Government has a source of funds to boost capital spending!

In the aftermath of the Budget there has been much discussion of the impact on bond yields of extra government borrowing to finance increased capital spending. Really, this shouldn't be a problem - there is no need to issue more conventional gilts to institutional investors. Defined Contribution pension savers, particularly those with modest sized pots of money, would welcome a mechanism for converting their savings into a secure retirement income.

It's time for HM Treasury to get creative and issue "Deferred Escalating Annuity Income" bonds. Such bonds might have a term of 30 years with coupons payable in Years 11-30. During Years 1-10 the bond would be 'zero coupon' before converting into 'annuity income' for the next 20 years. The coupon could be a level payment but it would be preferable if payments increased ('escalated' in the annuity jargon) at a fixed rate per annum.

This bond provides the opportunity to guarantee a 55 year old a certain level of income payable from age 65 to 85. The two key metrics (fixed at outset for the 30 year term) are the rate of return ('redemption yield') and the escalation rate. Assuming a 5% return and a 3% escalation rate you would be looking at an income starting at ￡1,000 per annum from an investment of ￡10,000.

The key attraction for the UK Government is the cashflow profile of this instrument. There is no cash outflow (servicing cost) for an initial period, so this could match the construction phase of an infrastructure project. Once that project is completed and the resulting power station, railway or whatever becomes operational, it generates an income to cover the annuity payments. As there is no capital payment at the end of the term, this bond has a zero redemption value!

There is a pressing need to provide ready made retirement income solutions for those aged 50+ with modest levels of pension savings - that's the mainstream market! Just think of the reassurance for that cohort if instead of worrying about their level of future income right up until their retirement date, they were able to plan ahead by 'locking-in' their income from 10 years beforehand. No doubt they would also be grateful if their investment led to lower energy bills!