Annuity rates at risk of going lower

Enhanced annuity rates closely follow the change in yields and have already corrected the recent fall. However, standard rates increased last month by 0.56% and are now looking high.

The following chart shows the strong correlation between gilt yields and annuities since October 2013.

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

The chart shows how the yields have reduced and are now 0.30% lower than the level in October 2013 whereas annuities are 2.25% higher.

Compared to the beginning of the month yields have reduced 13 basis points although at that time rates could have improved another 0.24% so this would suggest a 1.06% reduction for annuities is possible.

For our benchmark example a person aged 65 with a fund of £100,000 could have purchased a single life, level annuity with an income of £6,143 pa. A 1.06% fall would reduce the rate to £6,078 pa or back to where they were

After falling to a low for the year of £6,037 pa in February annuity rates had been slowly recovering after reaching a recent high in November 2013 for our benchmark example of £6,196 pa.

It is likely the recent uncertainty will subside once the US and Europe clarify the extent of sanctions on Russia and if so gilt yields could recover to support the current level for standard rates and see enhanced and impaired annuity rates recover the 1.6% recent losses.