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30 August 2013 last updated
Annuity Rates - August 2013

Providers improve annuity rates following a strong increase in gilt yields based on interest rates, US stimulus and Eurozone expectations.

Standard rates:  
annuity rates up 1.93%
Enhanced rates:  
annuity rates up 1.86%

As the 15-year gilt yields reach a high for the year of 3.29% providers have followed with better annuity rates especially from Legal & General, Aviva for standard rates with Just Retirement and Liverpool Victoria for enhanced annuities.

The strong yields have been due to investors expecting the US Federal Reserve to taper their stimulus and also the Bank of England to resort to higher interest rates despite their "forward guidance" policy.

The Eurozone also looks like they will exit their recession posting some growth figures after 18 months in decline. There is some risk from military action against Syria which resulted with investors moving funds to safe havens reducing yields and this could develop in September.

Annuity Rates Review August 2013
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Providers matching changes in gilt yields

15-year gilt yields increased 23 basis points last month and providers have followed this with higher pension annuities with a 1.93% rise for standard rates and 1.86% for enhanced rates leaving very little scope for further improvements.

In the short term, one month, we would expect standard rates to increase by 0.37% on average with lifestyle enhanced and smoker annuities decreasing by 0.44% on average.

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   81%
annuity rates no change   2%
annuity rates decrease   7%
Increases of:
0.3% - 4.4%

  Decreases of:
  Fig 1: Annuity rate changes for the whole market

This month 90% of annuities increased for both standard, enhanced and smoker rates by between 0.3% and 4.4%. The biggest increases have been from lifestyle enhanced and smoker rates for single lives aged 60 up 4.4% and those aged 70 plus up over 3.0%.

Only 8% of annuities decreased as providers were re-balancing and making minor adjustments in their markets so falls were not significant. Only 2% were unchanged during the month.

Equity markets started at 6,621 and decreased 208 points to end at 6,413. This represents a 3.2% decrease and for people that remain invested have seen their fund fall in value slightly which would offset the rise in pension annuity rates.

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 single life annuities with a 10 year guaranteed period increased the least and have the greatest potential for further gains next month. The following chart shows the three month changes.

Standard annuity 3 month changes
Fig 3: Change in standard rates last 3 months compared to gilt yields

Over the last three months all annuity rates are ahead the rise in 15-year gilt yields and on average could decrease by 1.36% if gilt yields remain the same over time.

What happened to enhanced rates

Lifestyle smoker and enhanced annuities have increased the most and all annuities have exceed the rise in yields. In the short term it is likely that annuity rates will decrease slightly especially if yields drift back down as can be seen in the following chart.

Enhanced annuity 1 month changes
Fig 4: Change in enhanced rates last month compared to gilt yields

For smoker and enhanced annuity rates escalating rates have exceeded increases in yields and all other rates have the potential for increases of up to 1.18%.

Enhanced annuity 3 month changes
Fig 5: Change in enhanced rates last 3 months compared to gilt yields

Over three months all rates have exceeded the rise in yields and decreases of between 1-3% can be expected, especially for escalating annuities.

The impaired providers such as Just Retirement, Liverpool Victoria and Partnership follow the changes in yields more closely than standard rates. See Annuity Rates Review For the latest updates.

News related stories:
Latest annuity rates improve 1.5% but Syria action could reverse gains
Pension annuity income risk as Bank of England may start QE again
UK annuities boost as Fed plan to taper QE to start from September
Annuity rates edge higher as Fed plans to taper QE
Retirement annuities threat as yields fall on UK and US stimulus plans

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  70 £6,270 £5,588  
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