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5 June 2020 last updated

Annuities could rise as equity markets and gilt yields rebound
Equity markets and gilt yields rebound
  Annuity rates could rise 1.9% with higher gilt yields as US markets lead equities higher
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Strong rise in US equities with better than expected economic data and less impact from Covid-19 sends global markets and gilt yields higher.

The US Dow Jones Index is up 6.4% for the first week of June with the FTSE-100 Index increasing 318 points or 5.1% to 6,484. Since reaching a low of 4,993 on 23 March the index has increased 1,491 points or 29.8%.

Yields on bonds and gilts have increased with the 15-year gilt yields rising 19 basis points to 0.58%. As annuity rates are mainly based on these yields it suggests that providers may be able to increase pension annuities by about 1.9% at some point in the future if gilt yields remain at this level.

In the US the level of unemployment has reduced from 14.7% to 13.3% when analysts expected the level of unemployment to increase to 19%. In addition there is substantial fiscal and monetary stimulus available to support the economy when needed.

Gilt yields and annuity rates

  FTSE-100 index and gilt yields
  Dec Jan Feb Mar Apr May June
FTSE 7,542 7,286 6,580 4,993 5,901 6,076 6,484
Rates £5,098 £5,032 £5,027 £4,853 £4,926 £4,920 £4,920

Fig 1: Chart and table comparing FTSE-100 Index and 15-year gilt yields

The above chart and table shows the rapid recovery in the FTSE-100 index after reducing to 4,993 following investor fear of the economic impact of Coronavirus.

Find related news here:
Equity markets rally on hopes for vaccine as yields lack direction
Annuity rates higher despite lower yields with global economic concerns
Equity markets surge 15% as US Senate agrees $2tn stimulus package

The combination of news from drugs researcher Moderna on 18 May of a positive outcome from the vaccine trial against Covid-19 and better than expected unemployment figures in the US has given investors more confidence that the economic outlook may not be as bleak as expected.

Rising equity markets is against a backdrop of demonstrations and protects around the would after the death of George Floyd and continuing spread of Covid-19 in South America and Middle Asia.

During the Coronavirus pandemic annuity rates have remained surprisingly steady with our benchmark example of a 65 year old with £100,000 buying an annuity on a single life, level basis reducing from £5,032 pa in January to £4,853 pa in March.

The rate of £4,920 pa in June is actually 1.93% higher than the figure in October 2019 and for those invested in equities, your fund is likely to have recovered much of the losses sustained since March.

News related stories:
Retirement income at decade low with panic selling on equity markets
Investors seek safety of gilts as global health emergency declared
Annuity rates lower as demand for safe havens rise on coronavirus fears
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  65 £7,295 £6,868  
  70 £8,213 £7,669  
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