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1 August 2018 last updated

Annuities could rise 1.6% as gilt yields recover on central bank plans

Annuities could rise 1.6% as gilt yields recover 12 basis points during the month as the Bank of Japan plans to make the first tweaks to its monetary policy since 2016 aiming to counter low inflation.

Gilt yields bounce back during the month up 12 basis points while annuity rates have reduced up to 1.3% suggesting the providers have more room to increase rates again.

The rise in yields was due to investors selling bonds around the world after the Bank of Japan (BOJ) reviewed its monetary policy with the intention of reducing stimulus to increase inflation.

Japan's central bank has not made any change to its stimulus policy of buying bones and this is the first time they have considered making tweaks since 2016.

It is a significant move as Japan is a major exporter of capital due to the suppressed bond market at home and this has seen selling of bonds and gilts globally.

UK pension annuities are exposed to any action that impacts the 15-year gilt yields.

Annuities could rise as yields recover
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Gilt yields recover as investors sell bonds

With the expectation of less stimulus supporting the price of bonds and gilts investors have been selling globally sending prices down and yields up.

A similar stance to top stimulus was taken last month from the European Central Bank (ECB) indicating the end of the asset purchase programme expected now in the summer of 2019.

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

The above chart compares the change in annuity rates and 15-year gilt yields since August 2017. Providers trailed the rise in yields during 2017 and were back on a level basis by February 2018.

The providers have since maintained rates and for for our benchmark example of a 65 year old with a £100,000 fund buying a single life, level income rates are 2.92% higher rising from £5,473 pa a year ago to £5,633 pa in July 2018.

Over the year there has been an increase of £160 pa in lifetime income, the Office of National Statistics (ONS) would expect a male to live for 17.3 years and he will have £2,768 more over his lifetime. For a female she can expected to live for 20.4 years increasing her lifetime income by £3,264.

For annuities the providers have maintained annuity rates above the rise in gilt yields with more competition and an expectation of higher interest rates in the future and less stimulus from central banks

News related stories:
Pension annuity rates up over 1% with competition from providers
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Annuity rates reduce as interest rate rise unlikely due to weak UK growth
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Related internet links:
Market Watch - Treasury notes rise with BOJ policy shift
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