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31 July 2012 last updated
Annuity Rates - July 2012 review

Annuity rates continue to fall to an all time low as gilt yields slide further

Standard rates:  
annuity rates down 1.31%
Smoker rates:  
annuity rates down 1.73%

Annuity rates have tumbled to an all time low level with our benchmark annuity for a 65 year old male on a level single life basis reducing £160 pa in July to an income of £5,802 pa. Since June 2011 the annuity income has reduced £917 pa from a high of £6,806 pa or a fall of 13.4% in just over a year.

The reason are gilt yields with the 15-year gilt yields reducing 194 basis points from a high of 3.98% to 2.04%. Over this period of time annuity should have reduced by 19.4% which suggests they could reduce by another 5.9%.

Gilt yields are under pressure with the government anouncing £50 billion of Quantitative Easing on 5 July and purchases gilts from financial institutions thereby increasing the price and reducing yields which reduces annuity rates for pensioners.

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Annuities lower due to QE and Eurozone fears

Find out more: gilt yields for July

The £50 billion of QE now brings the total to £325 billion and in addition investor fears over Spain's ability to avoid a bailout evaporated as their 10-year bond yields increased to a high of 7.66%, above the 7% level deemed to be the point when a country required a bailout. Investors moved funds to safe havens such as UK government bonds and the combined action of this and QE pushed the 15-year gilt yields to an all time low of 2.03%. Gilt yileds for the month decreased by 25 basis points increasing pressure on annuity provisders.

By the end of the month with no improvement in gilt yields annuity providers made significant reduction in standard annuity rates from Legal & General, Aviva, Canada Life and impaired annuity providers such as Just Retirement, Liverpool Victoria and Partnership Assurance.

Overall 90% of annuities reduced with standard annuity rates lower by 1.31% which is more than last month. On the other hand smoker annuities are lower by 1.73% which is less than last month.

Fig 1 below shows the
annuities changes for the whole market and the proportion that have either increased, decreased or or did not change. It also shows the range increases or decreases of the annuity rates over 1 month ending July 2012:

Annuity Rates Changes
Increase No change Decrease
annuity rates increase   9%
annuity rates no change   1%
annuity rates decrease   90%
Increases of:
0.3% - 2.6%

  Decreases of:
0.6% - 2.9%
  Fig 1: Annuity rate changes for the whole market ending July 2012

Fig 1 above shows that 9% of annuities increased and this was concentrated in the escalating annuity rates for males and joint life annuitants aged 55 to 70 with increases of 0.3% to 2.6%. Standard annuities declined by between 1.0% and 2.7% while smoker annuities decreased by 0.6% to 2.9%.

Equity markets were volatile starting at 5,641 and ending at 5,635 with a range of about 200 points so pensioners should not have experienced a significant change in their pension fund when purchasing an annuity during July.

What happened to rates during July

Fig 2 below shows for a fund of £100,000 the change in annuity rates for males, females and joint from age 55 to 75 with different annuity options such as level or escalating over 1 month ending July 2012:

Annuity Rate Changes - Standard
  Male * Female * 50% Joint
annuity rates down   1.77%
annuity rates down   1.76%
annuity rates down   1.77%
Level + 10 yr
100% joint **
annuity rates down   2.07%
annuity rates down   1.80%
annuity rates down   2.15%
3% escalation
annuity rates up   0.77%
annuity rates down   0.68%
annuity rates up   0.72%
Annuity Rate Changes - Smoker
  Male * Female * 50% Joint
annuity rates down   1.30%
annuity rates down   1.63%
annuity rates down   1.89%
Level + 10 yr
100% joint **
annuity rates down   1.51%
annuity rates down   1.73%
annuity rates down   1.94%
3% escalation
annuity rates down   1.52%
annuity rates down   2.04%
annuity rates down   2.29%
  Fig 2: Annuity rate changes for 1 month ending July 2012
  * Male and female on a single life basis only
  ** Joint life option is level, 100% spouse benefit and no guarantee

The above table shows the average changes for level, level plus 10 year guarantee and 3% escalation for males, females and joint life annuitants between the ages of 55 and 75.

In terms of the largest reductions in pension income for last month, based on a fund size of £100,000 standard annuities on a level basis for those aged 65 experienced the worst decreases. For males the fall in income was £160 pa or 2.6%, females £142 pa and joint life £131 pa. Similar decreases were also experienced for level and 10 year guarantee period annuities. Unusually escalating rates generally increased manily due to Legal & General improving their rates by about £60-£80 pa for males and joint life annuities but decreasing female rates by £30-£70 pa.

For smokers all annuity rates decreased and based on a fund size of £100,000 standard annuities on a level basis the largest decrease was for female single life aged 65 with a decrease of £150 pa or 2.2% and the majority of the decreases were between £100-£130 pa for males, females and joint annuities.

Annuity rates change to match gilt yields

Annuity rates are based on the 15-year gilt yields which are primarily used to secure the income for pension annuities. Fig 3 below compares the difference between annuity rates and gilt yields showing the direction annuities need to move and the percentage amount to match gilt yields. It shows the difference when compared over the last 1, 3 and 6 months.

Standard Annuities - Change Expected
  June July August
1 month
annuity rates down   3.74%
annuity rates up   2.81%
annuity rates down   1.19%
3 months
annuity rates down   3.25%
annuity rates down   1.41%
annuity rates down   2.17%
6 months
annuity rates down   5.94%
annuity rates up   0.33%
annuity rates down   1.02%
Smoker Annuities - Change Expected
  May June July
1 month
annuity rates down   3.32%
annuity rates up   3.96%
annuity rates down   0.77%
3 months
annuity rates down   1.07%
annuity rates up   0.58%
annuity rates down   0.26%
6 months
annuity rates down   0.96%
annuity rates up   4.29%
annuity rates up   3.62%
  Fig 2: Annuity rate changes required to match gilt yields

The decrease in gilt yields this month from 2.29% to 2.04% has forced providrs to decrease annuity rates and based on the change in gilt yields and the change in annuities the above table shows that standard annuity rates will decrease by 1.19% in the short term. Over the medium term annuity rates have further to fall so if gilt yields remain at current levels annuities will decrease by 2.17% across the board.

Smoker annuity rates have been reduced more agressively by providers so in the short term the reduction will be 0.77%. Enhanced and impaired annuity rates have decreased throughout July and are likely to decrease further. Providers of impaired annuities such as Just Retirement, Liverpool Victoria and Partnership are quick to change their rates on a daily basis whereas the standard annuity providers may only make changes every two weeks.

The annuity market is focused on the short term at the moment as providers are slow to increase rates and will wait for a reasonable improvement in economic and political environment, away from the fear that is driving investors currently and an increase in gilt yields before considering to increase annuity rates. See Annuity Rates 2012 for the latest updates.

Annuity Rates
  Age Single Joint  
  55 £3,851 £3,569  
  60 £4,268 £3,973  
  65 £4,965 £4,581  
  70 £5,831 £5,274  
£100,000 purchase, level rates, standard
Unisex rates and joint life basis
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