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6 May 2014 last updated
Providers reduce annuities after 50% fall in demand following the Budget
15-year gilt yields chart
Based on figures for April 2014
15-year gilt yields April 2014
 

Despite radical changes in the budget annuity providers have ignored opportunities to improve their offers, lowering their rates following significant falls in demand for annuities.

Standard rates:  
annuity rates down 0.67%
Enhanced rates:  
annuity rates down 0.55%
Gilt yields:  
annuity rates down 1 basis point



 
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Providers snub Budget changes with lower rates

The 15-year gilt yields were lower by only 1 basis point with very little movement in yields. As a general rule a 10 basis point rise would result in a 1.0% rise in annuity rates.

Although the Budget provided an opportunity for providers to improve their offers, annuity rates have been reduced even though there was virtually no change in yields. Providers have suffered significant decreases in demand with legal & general sales 40% lower and Standard Life 50% lower.

Standard providers decreased their rates by 0.67% and we would expect so see an increase of about 0.57% in the short term but in the medium term of 3 months annuity rates can increase by 0.26%.

Smoker and enhanced annuity providers decreased their rates by 0.55% on average and an increase of 0.45% is possible in the short term but in the medium term of 3 months we can expect an increase of 1.27%.

Equity markets started at 6,598 and increase 182 points to end at 6,780. This represents a 2.75% rise and for people that remain invested have seen their fund values increase in value and for those buying annuities this has offset the lower annuity rates and can expect a higher retirement income.


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   3%
annuity rates no change   12%
annuity rates decrease   85%
Increases of:
0.0% - 0.7%

  Decreases of:
0.1%-3.2%
  Fig 1: Annuity rate changes for the whole market

For this month virtually all rates decreased with enhanced and smoker annuities lower by up to 0.55% but a 3.2% decrease for single life, level rates aged 65.

There were small increases of 0.68% from standard rates for those aged 65 buying 3% escalating annuities.

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 decreased and in particular for for escalating rates (other than those aged 65) with decreases of up to 3.2% for both single and joint lives although the average was between 1.5% and 1.8%.

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 annuities providers have continued to lower rates and in particular for those aged 65 on a single life basis.

Impaired providers have also decreased their rates slightly although have not been as aggressive as the standard or smoker rates. See Annuity Rates Review For the latest updates.

Changes to the 15-year gilt yields

There was concern that technology stocks were over-priced sending markets and yields lower by 7 basis points but this was recovered during the month.

The US Federal Reserve stimulus has reduced from $85 billion last year to $45 billion in April. The Bank of England has continued to suggest an interest rate rise is possible as the economy recovers.

For April the yields range for the month was from 3.07% to 3.19% or 12 basis points which is the same as last month. 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 - April 2014
  Tues 1st Wed 2nd Thurs 3rd Fri 4th
 
3.18%
gilt yields up   0.01
3.21%
gilt yields up   0.03
3.19%
gilt yields down   0.02
3.14%
gilt yields down   0.05
Mon 7th Tues 8th Wed 9th Thurs 10th Fri 11th
3.12%
gilt yields down   0.02
3.15%
gilt yields up   0.03
3.15%
gilt yields no change
3.08%
gilt yields down   0.07
3.07%
gilt yields down   0.01
Mon 14th Tues 15th Wed 16th Thurs 17th Fri 18th
3.09%
gilt yields up   0.02
3.07%
gilt yields down   0.02
3.09%
gilt yields up   0.02
3.11%
gilt yields up   0.02
 
Mon 21st Tues 22nd Wed 23rd Thurs 24th Fri 25th
 
3.16%
gilt yields up   0.05
3.12%
gilt yields down   0.04
3.14%
gilt yields up   0.02
3.09%
gilt yields down   0.05
Mon 28th Tues 29th Wed 30th    
3.16%
gilt yields up   0.07
3.18%
gilt yields up   0.02
3.16%
gilt yields down   0.02
   
  Fig 2: Daily 15-year gilt yields and changes

News related stories:
UK annuity income lower after FTSE index falls on tech bubble fears
UK annuity rates unchanged by Fed tapering but interest rates will bite
Radical changes to pension annuities announced in Chancellor's Budget

Annuity Rates
  Age Single Joint  
  55 £4,216 £3,974  
  60 £4,702 £4,423  
  65 £5,453 £5,013  
  70 £6,105 £5,482  
£100,000 purchase, level rates, standard
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