Annuity rates could increase over 1.0% as drug companies reveal successful trials for a Covid-19 vaccine sending gilt yields 17 basis points higher for the month.
Providers of annuity rates have the opportunity to raise annuities after the 15-year gilt yields increased 17 basis points from 0.49% last month to 0.66% on 11 November.
Gilt yields are at 0.58% and could mean a rise for standard annuity rates of 1.1% is possible and for enhanced annuities this could be as much as 1.8% is yields remain at current levels.
On the 9 November Pfizer and BioNTech announced the results from the Covid-19 vaccine trials with stunning efficacy level of 90.0% or higher and on 16 November the Moderna vaccine produced efficacy levels of 94.5%.
Annuity rates and gilt yields
Fig 1: Chart comparing standard annuity rates and 15-year gilt yields
Annuity rates are higher by 0.29% since March 2020 for our benchmark example against 15-year gilt yields which have been more volatile during the lockdown.
As counties moved to a full lockdown in Europe investors bought the safety of bonds and gilts sending the 15-year gilt yields to an all time low of only 0.162% on 9 March 2020.
The chart and table above are based on our benchmark example of a person aged 65 year old with a £100,000 fund offering £5,098 pa when buying an annuity on a single life, level basis.
Providers have reduced rates by -4.5% or -£231 pa to the November level of £4,867 pa although have not followed gilt yields any lower at the start of the Coroavirus pandemic.
The drug company Pfizer has has 41,000 volunteers across the world with half given the vaccine and half a placebo. They can produce 1.3 billion doses by the end of 2021 of which the UK has secured 40 million.
With an efficacy level of 90.0% Pfizer intend to apply to the Food and Drug Administration (FDA) in the US for an emergency authorisation.
The other drug company is Moderna with an efficacy level of 94.5% and intend to produce 1.0 billion in 2021 with the UK reserving 5 million.
Both the Pfizer and Modena vaccines need two doses for each person
and the UK has agreed access to other potential vaccines with 100 million doses from Oxford-AstraZeneca.
In total the UK has secured the supply of 355 million doses and these are planned to be given to the highest risk groups and those aged over 80 first down to those aged 50 and above.
The prospect for global economies in 2021 could be improved if the target vaccinations can be achieved and this would see gilt yields rise with an improvement in annuity rates.