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5 March 2014 last updated
Impaired annuity rates rise as standard rates reduced by providers
15-year gilt yields chart
Based on figures for February 2014
15-year gilt yields February 2014
 

Impaired annuity rates have been increased by up to 2.5% as competition increases while standard annuities slip lower after a the 15-year gilt yields end about where they started the month.

Standard rates:  
annuity rates down 0.31%
Enhanced rates:  
annuity rates up 0.83%
Gilt yields:  
annuity rates up 1 basis point



 
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Mixed annuities rates react to market volatility

The 15-year gilt yields have increased by 1 basis point after a stable month with a narrow range. As a general rule a 1 basis point rise would result in a 0.1% rise in annuity rates.

The Federal Reserve pledged to continue with the stimulus package giving markets confidence that there would not be a sudden change in policy.

Equity markets started at 6,510 and increased 300 points to end at 6,810. This represents a 4.60% rise and for people that remain invested have seen their fund increase in value to counter the fall in standard annuity rates.

Standard providers decreased their rates by 0.31% and we would expect so see an increase of about 0.41% in the short term but in the medium term of 3 months they can increase by 1.54%.

Smoker and enhanced annuity providers increased their rates by 0.83% on average and a decrease of 0.73% is possible in the short term but in the medium term of 3 months the decrease is less at 2.33%.

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   62%
annuity rates no change   11%
annuity rates decrease   27%
Increases of:
0.3% - 1.6%

  Decreases of:
0.2%-2.6%
  Fig 1: Annuity rate changes for the whole market

All of the enhanced and smoker annuities increase last month and in particular impaired annuities were higher by up to 2.5%.

For standard rates a small number showed modest increases with the majority decreasing or not changing. The largest decreases were for escalating rates for single life annuitants down by as much as 2.70% for those aged between 60 and 75.

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

Standard annuities showed small changes relative to gilt yields except for single life, 3% escalating rates which decreased significantly.

What happened to enhanced rates

Lifestyle smoker and enhanced annuities have decreased in line with the fall in gilt yields and in particular for joint life rates.

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

For enhanced and smoker annuity rates all the rates increased more than the gilt yields suggesting more active competition in the market from providers.

Impaired providers have increase their rates and are being more aggressive with winning business. See Annuity Rates Review For the latest updates.

Changes to the 15-year gilt yields

The US Federal Reserve has reassured investors that there will not be any sudden change in the stimulus policy and that there will be a steady decline over time.

The stimulus has reduced to $75 billion with a further $10 billion this month to $65 billion and will continue future reductions based on the improvement in the US economy.

For February the yields range for the month was from 3.13% to 3.26% or 13 basis points which is one of the lowest ranges compared to previous months. 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 - February 2014
Mon 3rd Tues 4th Wed 5th Thurs 6th Fri 7th
3.14%
gilt yields down   0.02
3.15%
gilt yields up   0.01
3.14%
gilt yields down   0.01
3.19%
gilt yields up   0.05
3.17%
gilt yields down   0.02
Mon 10th Tues 11th Wed 12th Thurs 13th Fri 14th
3.18%
gilt yields up   0.01
3.19%
gilt yields up   0.01
3.26%
gilt yields up   0.07
3.22%
gilt yields down   0.04
3.22%
gilt yields no change
Mon 17th Tues 18th Wed 19th Thurs 20th Fri 21st
3.21%
gilt yields down   0.01
3.20%
gilt yields down   0.01
3.18%
gilt yields down   0.02
3.24%
gilt yields up   0.06
3.22%
gilt yields down   0.02
Mon 24th Tues 25th Wed 26th Thurs 27th Fri 28th
3.21%
gilt yields down   0.01
3.19%
gilt yields down   0.02
3.17%
gilt yields down   0.02
3.13%
gilt yields down   0.04
3.17%
gilt yields up   0.04
         
         
  Fig 2: Daily 15-year gilt yields and changes

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  60 £4,702 £4,423  
  65 £5,453 £5,013  
  70 £6,105 £5,482  
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