10 April 2012 last updated

Annuity rates set to fall with decreasing gilt yields

A significant fall in gilt yields with uncertainty in the Eurozone is expected to force annuity rates to lower levels. Standard annuity rates are set to fall by 0.8% and up to 1.5% fall for impaired annuities after a significant decrease in gilt yields. The 15-year gilt yields decreased by 16 basis points turning our 'what next for annuities' table red for the first time for the last couple of months. As a general guide a 16 basis point reduction in 15-year gilt yields would mean a 1.6% fall in pension annuity rates at some time during the month, especially if the economic news does not improve. As standard annuity rates were lower than expected the decrease is not as great as this although impaired annuity rates are likely to match the reduction in the next few days as these providers such as Just Retirement, Partnership and Liverpool Victoria are tracking the yields very closely.

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Economic uncertainty risk to annuity rates

All the gains in the gilt yields over the past month has now disappeared and are only slightly above the low for the year achieved in January. This will represent a risk to pensioners retiring now as it may take a month for the funds to transfer from one provider to another and annuity rates could easily fall during this time. Looking at rates over a longer time period of three months the change in standard rates are about equal to the change in gilt yields so if the standard annuity providers are working over this time frame gilt yields would need to reduce further before rates change. For the latest updates see Annuity Rates review.

Markets decreased around the world with the FTSE-100 index down 128 points to 5,596 the lowest level since January, US index Dow Jones down 213 to 12,716 and European markets 1.5% and 3.0% on fears for the global economy and poor US jobs figures issued last Friday. In the US the expectation was for 200,000 new jobs created when the actual figure was 120,000 and in Eurozone debt problems and in particular Spain saw the cost of it's bonds increase to a new four month high.

With this uncertainty investors are move funds into safe havens such as German and UK government bonds pushing up the price and lowering yields. This is bad news for pensioners still invested in equities as the FTSE-100 index has reduced by 4.7% in the last week with the prospect of lower annuities in the next few weeks. In most cases pensioners retiring will remain in equities until the annuity is purchased and the combination of lower equities and annuity rates may result in a significant reduction in the expected pension income. It is likely that April will remain volatile with greater risks for pensioners and their pension.