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30 June 2012 last updated
Annuity Rates - June 2012 review

Annuity rates fall but new eurozone deal may see a turnaround in July

Annuities have reduced for the second month in a row by as much as 4% as providers adjusted annuity rates to reflect the significant reduction of 55 basis points in the 15-year gilt yileds in May.

At the end of June the Eurozone leaders have managed to agree a deal that will see bailout funds made available to struggling banks without the need for the country to accept new austerity measures resulting in an 11 basis point increase in gilt yields.

This changes the future prospects of annuity rates with some annuities set to increase in July. The decreases in June for smoker annuities was very similar to the previous month but standard rates saw lower decreases. Overall the range of decreases was narrow and less volatile with decreases of 1.0% to 4.0%. The improvement in equity markets has helped may pensioners secure higher annuity income from their funds.


 
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Annuity rates continue to decrease in June

Find out more: gilt yields for June


All annuities reduced in June with standard annuity rates lower by an average of 1.11% which is less than the previous month. In contrast smoker annuities are lower by a greater amount decreasing by an average of 2.26%.

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 30 June 2012:

Annuity Rates Changes
Increase No change Decrease
annuity rates no change   0%
annuity rates no change   0%
annuity rates decrease   100%
Increases of:
0.0%

  Decreases of:
1.0% - 4.0%
  Fig 1: Annuity rate changes for the whole market ending June 2012

Fig 1 above shows that there were no increases in annuity rates for June and all rates decreased with a range from 1.0% to 4.0%.

Despite the decreases in annuity rates for June, the 15-year gilt yields increase by 17 basis points with much of this improvement in the final day of the month. Generally speaking a 17 basis point incease would result in a 1.7% increase in annuity rates and should gilt yields remain at current level or improve annuities may also increase in July. In particular the deal reached by the Eurozone regarding the bailout of banks could mean that annuities have reached a floor in the current phase of the crisis.

Equity markets have increased during June with the FTSE-100 index starting the month at 5,315 and up 256 points or 4.8% to end at 5,571. The Dow Jones index in the US was also up starting at 12,393 and up 487 points or 3.7% to end at 12,880.

What happened to rates during June

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 30 June 2012:


Annuity Rate Changes - Standard
  Male * Female * 50% Joint
Level
annuity rates up   1.07%
annuity rates up   1.13%
annuity rates up   1.09%
Level + 10 yr
100% joint **
annuity rates up   1.06%
annuity rates up   1.13%
annuity rates up   1.11%
3% escalation
annuity rates up   1.10%
annuity rates up   1.23%
annuity rates up   1.13%
Annuity Rate Changes - Smoker
  Male * Female * 50% Joint
Level
annuity rates up   1.86%
annuity rates up   2.03%
annuity rates up   2.38%
Level + 10 yr
100% joint **
annuity rates up   2.11%
annuity rates up   2.17%
annuity rates up   2.73%
3% escalation
annuity rates up   2.38%
annuity rates down   2.19%
annuity rates up   2.78%
  Fig 2: Annuity rate changes for 1 month ending 30 June 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. Standard pension annuities have reduced again this month with decreases of 1.0% to 1.5% across the board from the leading providers Legal & General, Canada Life and Aviva. The largest decreases were for younger annuitants aged 55 for males, females and joint pension annuities. For a male aged 65 with a fund of £100,000 this would mean a reduction of income of £59 per year for a level single life annuity and a female aged 65 for a level single life annuity the reduction would be £57 per year.

Smoker annuity rates decreased by a larger amount from 1.0% to 4.0% with the largest decreases of 3.0% to 4.0% for males aged 55 and 50% joint life with 3% escalation. The decreases were mainly due to Just Retirement and Liverpool Victoria reducing their rates during the month. For a male aged 55 with a fund of £100,00 this would mean a reduction of income of £176 per year for a level single life annuity and a 100% joint life aged 65 for a level annuity the reduction would be £183 per year.

Annuity rates change to match gilt yields

Annuity rates are based on the 15-year gilt yields which are mainly used to secure the income for pension annuities. Fig 3 below compares how annuity rates and gilt yields have changed showing the direction annuities need to move to match the change in gilt yields by the end of the month. It compares the change over the past 1, 3 and 6 months.


Standard Annuities - Change Expected
  May June July
1 month
annuity rates up   0.46%
annuity rates up   3.74%
annuity rates up   2.81%
3 months
annuity rates up   1.61%
annuity rates up   3.25%
annuity rates up   1.41%
6 months
annuity rates up   1.92%
annuity rates up   5.94%
annuity rates up   0.33%
Smoker Annuities - Change Expected
  April May June
1 month
annuity rates up   0.02%
annuity rates up   3.32%
annuity rates up   3.96%
3 months
annuity rates up   3.97%
annuity rates up   1.07%
annuity rates up   0.58%
6 months
annuity rates up   2.42%
annuity rates down   0.96%
annuity rates up   4.29%
  Fig 2: Annuity rate changes required to match gilt yields


Over the short term the data would suggest that annuity rates for both standard and smoker annuitants can in the very short term increase by between 2.8% and 4.0% and this reflects the fact that providers have reduced rates just at a time when gilt yields increased due to the Eurozone bank bailout deal. Smoker rates are more likely to increase in July and have been reduced more heavily than standard rates in June. In the medium term standard rates could decrease by 1.41% and it is likely that these annuities will remain level unless gilt yields increase in July. See Annuity Rates 2012 for the latest updates.

For enhanced and impaired annuity rates the decreases have continued across the board with Partnership, Just Retirement and Liverpool Victoria making changes. These providers are likely to increase their rates should gilt yields remain at current levels.

Annuity Rates
  Age Single Joint  
  55 £4,206 £3,946  
  60 £4,699 £4,438  
  65 £5,433 £4,954  
  70 £5,983 £5,409  
£100,000 purchase, level rates, standard
Unisex rates and joint life basis
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