Yields threaten lower annuity rates

Providers of impaired annuities adjust their margins on a daily basis which can lead to falls in the rates offered. These margins have been reduced sufficiently to reduce the income offered but further falls are possible if yields reduce.

The following chart shows how yields and rates have changed since October 2013.

Fig 1: Chart comparing annuity rates and 15-year gilt yields

The sudden fall in yields in the last few days has resulted with a gap where annuities could reduce by 1.29%.

As an example for a person aged 65 with a fund of £100,000 could purchase a single life, level annuity with an income of £6,080 pa and this would fall to £78 pa to £6,002 pa with a fall of 1.29%.

In terms of lifetime income, the Office of National Statistics (ONS) would expect a male to live for 17.3 years and he will have £1,349 less over his lifetime. For a female she can expected to live for 20.4 years decreasing her income by £1,591.

Market expect interest rates to rise

Even though the Bank of England does not expect any change there is still an expectation of interest rates rise in the first quarter of 2015. In particular the housing market continues to see inflated house prices in London although monetary policy would be the last measure the Bank of England would consider.

It is likely that a sustained rise in house prices will result with increased wealth and greater consumer spending with the knock-on effect of inflation and higher interest rates.

For people considering buying annuities now it is likely rates will remain at current levels for the rest of the year. With improving interest rates in 2015 there is a strong probability annuity rates will rise but not for one or two years.

It would be possible to consider a fixed term annuity for one year allowing time to benefit from rising rates. This would provide you an income and a guaranteed maturity amount at the end of the term. The fund could be used to buy a lifetime annuity at that time from any provider in the market.