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23 April 2013 last updated
Annuity rates higher by 1.5% as Legal & General lead extends

UK annuity rates are higher by up to 1.5% as Legal & General extends their lead for many standard annuities after Canada Life improved their rates by as much as 4% which will help people retiring achieve a better deal at retirement.

Standard annuity rates have been strong in the past few months even after significant falls in the gilt yields. Annuities are mainly based on the 15-year gilt yields and since reaching a high of 2.76% in February yields have fallen back to 2.25%.

This represents a 51 basis point reduction and as a general rule would mean a 5.1% fall in annuity rates. However, Legal & General has increased their rates during this time after Canada Life improved their rates by between 1.8% to up to 4.0%.

This may be due to a long term cycle where rates were reduced before the EU Gender Directive even though yields were increasing leaving providers room for improvements today.

 
Annuity rates higher as L&G lead extends
 
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Standard annuities moving against yield trends

Annuities had been falling in line with the 15-year gilt yields up until the low of 2.02% reached in August 2012. After this time yields recovered, however, UK annuities continued to decrease in anticipation of the EU Gender Directive introducing unisex rates which equalised male and female annuities.

  Benchmark annuity rates and gilt yields
  Oct Nov Dec Jan Feb Mar Apr
Rate £5,605 £5,594 £5,425 £5,373 £5,485 £5,569 £5,625
Yield 2.31% 2.23% 2.31% 2.60% 2.52% 2.33% 2.25%

The above table shows that yields improved from a low of 2.02% in August to a high in February of 2.76% yet our benchmark for a person aged 65 with a £100,000 fund, single life and level annuity decreased only reaching a low in January.

Only after gender neutral pricing was introduced did the annuity providers added some value back with more competition even though yields are weak at the moment. The recent increase in rates is unlikely to continue without further gains in yields as the imbalance of the past six months has been removed.

For our benchmark example income has improved from a low of £5,373 pa to £5,625 pa an increase of £252 pa. Legal & General has always dominated our benchmark and now extended it's lead over Canada Life which is second with £5,494 pa.

Over the individuals lifetime the Office of National Statistics (ONS) would expect a male to live for 17.8 years and this would result in £4,485 more income. For a female the ONS would expect her to live for 20.4 years resulting in £5,140 more income over their lifetime.

Legal & General have increased their level annuities by 1.5%, however, they have decreased their escalating annuity rates by between 1-3%. Only about 12% of people at retirement select escalation to protect against inflation and the decreases for this month have exceeded the fall in gilt yields.

Equity gains still strong will help people retiring

Equity markets remain strong even though the indicators are mixed with the hope that the eurozone will reduce their interest rates to stimulate the economies. In contrast the US manufacturing sector is growing at a slower pace than expected with their purchasing managers' index (PMI) lower this month at 52.0 down from 54.6. A figure below 50 indicates contraction and above growth.

The combination of rising pension annuity rates and equities can make a significant difference to income at retirement and with yields remaining at their current levels people taking their benefits will see an improvement compared to the start of the year.

News related stories:
Enhanced annuity rates fall by 1% as Partnership reacts to gilt yields
Latest annuity rates may fall 4% as gilt yields collapse after US jobs data
Impaired annuities reduce 1.5% from leading providers on poor yields
Best annuity rates higher by 1.0% from Legal & General
UK annuity rates rise 1.5% from Legal & General as gilt yields fall
Related internet links:
BBC - US manufacturing growth slows
Guardian - FTSE-100 index up on ECB rate cut hopes
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