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30 June 2013 last updated
Annuity Rates - June 2013

As gilt yields continue to rise providers of annuities have increased rates significantly after US Federal Reserve plan to reduce their stimulus package this year.

Standard rates:  
annuity rates up 2.33%
Enhanced rates:  
annuity rates up 5.11%

With the 15-year gilt yields reaching at high of 3.08% last month a 42 basis point rise providers have increase annuity rates across the board although standard rates have more room for further improvements.

Smoker and enhanced annuity rates and up even more aggressively and in the medium term of 6 months now look too high. However, in the short term there remains the opportunity for people to secure these better than expected rates.

The US stimulus is used to buy bonds and gilts increasing prices and without this liquidity the lack of support will deflate the bond bubble. If the Fed continues this their $85 billion a month programme prices will rise again reducing yields and annuity rates.

Annuity Rates Review June 2013
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Still room for improvement in the short term

15-year gilt yields increased 42 basis points which means we would expect to see annuity rates rise by 4.2%. Find out more about the change in gilt yields:

Gilt yields surge to 3.08% high as US Federal Reserve ends stimulus

In the short term we would expect standard rates to increase a further 1.87% on average with lifestyle enhanced and smoker annuities decreasing by 0.91% 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   100%
annuity rates no change   0%
annuity rates decrease   0%
Increases of:
1.3% - 7.8%

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

This month 100% of annuities increased for both standard, enhanced and smoker rates by between 1.3% and 7.8%. In particular the impaired annuity providers have dominated the largest rises and may have over extended their offering due to competition and to meet year end targets, such as Just Retirement.

Equity markets started at 6,583 and reduced 368 points to end at 6,215. This represents a 5.5% decrease and for people that remain invested up to the point they take their benefits the fall may have been offset by the increase 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 annuities have lagged behind the rise in 15-year gilt yields and there is still room for improvement with single life, level and 10-year guarantee which could still rise the most by 2.45%. The following chart shows the six month changes.

Standard annuity 6 month changes
Fig 3: Change in standard rates last 6 months compared to gilt yields

Over the last six months 3% escalating annuities for both single and joint life can increase the most by between 4.5% and 4.9%. The fact that both short and medium term changes in rates relative to yields show improvements can be made indicates the providers are likely to make changes shortly.

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

In the medium term of 6 months decreases of between 1.7% and 6.1% could occur and in particular rates for 50% joint life with 3% escalation.

Enhanced annuity 6 month changes
Fig 5: Change in enhanced rates last 6 months compared to gilt yields

The impaired providers are competitive at the moment with Just Retirement at it's year end which could mean it needs to hit certain volume targets. This is driving rates higher so we could see some small reductions in the next few months especially if gilt yields decrease from their recent highs. See Annuity Rates Review For the latest updates.

News related stories:
Gilt yields surge to 3.08% high as US Federal Reserve ends stimulus
Enhanced annuities up 7.8% and now at risk of falls in medium term
Best annuity rates could rise 8% as gilt yields soar 39 basis points
Annuity income and equities reduce as Fed plans to stop stimulus

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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