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8 January 2016 last updated
UK annuity rates are lower with the start of Solvency 2 legislation
15-year gilt yields chart
Based on figures for December 2015
15-year gilt yields October 2015

UK annuity rates have been reduced ahead of the Solvency 2 legislation even though the 15-year gilt yields end the month higher.

Standard rates:  
annuity rates up 2.18%
Enhanced rates:  
annuity rates up 2.19%
Gilt yields:  
annuity rates up 12 basis point

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Annuity rates lower by over 2% for the month

Solvency 2 legislation introduced from 1 January 2016 has seen providers reduce annuity rates for the month of December by over 2.0% leaving some scope for increases if gilt yields do not decrease in 2016.

15-year gilt yields increased by 12 basis points in a volatile month as the Federal Reserve increases interest rates by 0.25% after the record low of 0%.

Standard providers lowered rates by 2.18% and we would expect to see annuities rise by a further 3.37% in the long term. Smoker and enhanced annuity providers decreased their rates by 2.19% on average and in the long term rates may rise by 3.39%.

Fig 1 below shows the annuity rates changes for the whole market and the proportion that have either increased, decreased or or did not change. It also shows the range of the changes of the annuity rates over the last month:

Annuity Rates Changes
Increase No change Decrease
annuity rates increase   14%
annuity rates no change   0%
annuity rates decrease   85%
Increases of:
up to 3.2%

  Decreases of:
up to 5.1%
  Fig 1: Annuity rate changes for the whole market

The majority of rates reduced with 14% rising, 0% remaining unchanged and 85% decreasing.

What happened to standard rates

Below shows a fund of £100,000 with the change in standard annuity rates for single and joint pensioners from age 55 to 75 with different annuity options such as level or escalating over 1 month compared to gilt yields:

Standard annuity 1 month changes
Fig 2: Change in standard rates last month compared to gilt yields

The majority of standard annuities reduced by up to 5.1% during the month except for single life rates aged 75 and 50% joint with 3% escalation rising about 3% in the month.

What happened to enhanced rates

Lifestyle smoker and enhanced annuities have decreased significantly across the board for all types of annuities and ages.

Enhanced annuity 1 month changes
Fig 3: Change in enhanced rates last month compared to gilt yields

For enhanced and smoker providers rates decreased by up to 5.1% and this is the sixth consecutive month of decreases. The providers have reduced their rates as Solvency 2 legislation started from 1 January 2016.

For the latest updates see Annuity Rates Review.

Changes to the 15-year gilt yields

The yields change for the month was from 2.23% to 2.17% or 6 basis points. Fig 2 below shows the daily 15-year gilt yields and the increase or decrease from the previous day's close:

15-Year Gilt Yields - December 2015
  Tues 1st Wed 2nd Thurs 3rd Fri 4th
gilt yields down   0.06
gilt yields down   0.01
gilt yields up   0.12
gilt yields up   0.02
Mon 7th Tues 8th Wed 9th Thurs 10th Fri 11th
gilt yields down   0.11
gilt yields no change
gilt yields up   0.07
gilt yields down   0.02
gilt yields down   0.04
Mon 14th Tues 15th Wed 16th Thurs 17th Fri 18th
gilt yields up   0.04
gilt yields up   0.10
gilt yields up   0.02
gilt yields down   0.09
gilt yields down   0.03
Mon 21st Tues 22nd Wed 23rd Thurs 24th Fri 25th
gilt yields down   0.02
gilt yields up   0.06
gilt yields up   0.06
gilt yields down   0.02
Mon 28th Tue 29th Wed 30th Thur 31st  
gilt yields down   0.02
gilt yields up   0.07
gilt yields down   0.02
  Fig 2: Daily 15-year gilt yields and changes

News related stories:
Impaired annuities lower by up to 6% ahead of Solvency 2 start date
Gilt yields and equities fall as Federal Reserve unclear about rate rise
Best annuities could rise as Federal Reserve delays raising rates
UK annuities could rise as gilt yields make strong recovery
Annuity Rates
  Age Single Joint  
  55 £4,574 £4,142  
  60 £4,961 £4,610  
  65 £5,691 £5,238  
  70 £6,478 £6,098  
£100,000 purchase, level rates, standard
Unisex rates and joint life basis
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