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17 November 2023 last updated

Annuities peak with falling gilt yields and unchanged interest rates
Annuities reach the peak
 

Annuity rates peak in October and are reducing as the prospect of higher interest rates diminishes.

 
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Annuities may have peaked in October 2023 as the Bank of England leaves interest rates unchanged and gilt yields reduce from record highs.

Annuities have reduced since the October peak in rates and after a -67 basis point fall in the 15-year gilt yields from a record high of 5.13% on 23 October to 4.46% on 17 November.

Gilt yields are lower after the Bank of England leaves interest rates unchanged at 5.25% and inflation falls to 4.6% in October from 6.7% in the previous two months.

Find related news here:
Pension annuities reduce by -3pc as gilt yields remain volatile
Annuity rates reduce as gilt yields reach a record 5.13pc high

Providers reduced annuity rates by -3.0% on average last month as the prospect of higher interest rates diminishes.

For our benchmark example of a 65 year old using £100,000 to purchase a single life and level income reducing -£343 pa or -4.6% from £7,447 pa ar the start of October to £7,104 pa in November 2023.

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


The above chart shows annuities remain at a fourteen year high for our benchmark example for a 60 year old using £100,000 to purchase a single life and 3% escalating income, even though annuity rates have reduce -3.02% this month.

For this benchmark example annuity income reached a peak of £4,638 pa in September 2023 reducing to £4,498 pa in October and a further -£145 pa to £4,343 pa in November remaining 60% up since December 2021.

Inflation in the US was lower than expected with Consumer Price Index (CPI) reducing from 3.7% in September to 3.2% in October.

In the UK inflation reduced faster than expected from 6.7% in September to 4.6% in October mainly due to falling energy costs and the Bank of England expects this to continue in 2024. This figure is considerably lower than it was in October 2022 when CPI reached a high of 11.1%.

This data shows that central banks may have reached the end of interest rate rises which are at 5.25%. The Bank of England chief economist Huw Pill has suggested market expectations for cuts from next summer were not "unreasonable".

The Bank of England is projecting inflation to reach the 2% target by the end 2025 and that interest rates are likely to be 4% by the end of 2024 and 3% by the end of 2025.

Analysts believe the first interest rate cut could occur as soon as June 2024 and this has implications for annuity rates. Gilt yields have already decreased from the October high of 5.13% remaining historically high at 4.46% although will fall further before interest rates reduce.

Providers are reducing annuity rates due to lower gilt yields and also due to higher than expected demand and administrative difficulties due to the higher volumes. Providers may also increase rates if they have the capacity for more business so the annuity market will remain volatile.

There are still opportunities to secure fourteen year high annuity rates although there is now a limited time before gilt yields and annuities reduce further.

News related stories:
Gilt yields rise to 4.8pc as interest rates will be higher for longer
Annuities rise 1.5pc with record yields expecting higher interest rates
Gilt yields soar to record 5pc as providers resist higher annuity rates
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  70 £8,170 £7,616  
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