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22 January 2014 last updated
Annuity rates 2% lower from Legal & General surprises market

Annuity rates were reduced by up to 2% from Legal & General in a surprise move that knocks the provider off the leading position in the market to rivals Aviva and Canada Life.

In a surprise move Legal & General have reduced their headline annuity rates by up to 2% leaving it behind other providers such as Aviva, Canada Life and Hodge Life for the first time this year.

This will have a significant impact on Legal & General as it seems they are no longer competitive for a wide range of fund sizes and ages as Hodge Life now dominates for funds under £100,000.

Annuity rates are based on the 15-year gilt yields and these have been increasing for the past two months and remain 21 basis points higher then they were at the beginning of November.

The lower rates from Legal & General suggests that standard annuities are less than expected and there is room for increases of as much as 2.97%. Impaired annuities have not decreased and there have been some small improvements.

Annuity rates 2% lower
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Risk of falls from other providers

With Legal & General virtually out of the market demand will increase for pension annuities from Aviva, Canada Life and for smaller funds under £100,000 from Hodge Life.

It is likely these providers may exceed their targets quickly for business volume and reduce their rates to curb demand with the customer having to accept a lower annuity income.

Our benchmark example for a person aged 65 with a fund of £100,000 could have purchased a single life, level annuity with an income of £6,184 pa yesterday and this has reduced by £97 pa to £6,087 pa.

In terms of lifetime income, the Office of National Statistics (ONS) would expect a male to live for 17.3 years and he will have £1,678 less over his lifetime. For a female she can expected to live for 20.4 years decreasing her income by £1,978.

Annuity rates may recover in February

The yields on bonds and gilts will change depending on demand and a lower price will produce a higher yield. Investors sell bonds and gilts if they perceive lower support in the future or better returns elsewhere. For pension annuities falling prices mean rates will increase.

The US Federal Reserve through their
fiscal stimulus package called Quantitative Easing (QE) have been buying bonds and long term mortgage debt to support the financial markets. This helps to release investor funds that can be directed to other investments and equity markets have been the main beneficiary.

Currently the Fed stimulus is $75 billion per month having been reduced by $10 billion in December. The Federal Open Market Committee have indicated that with continued improvements in the US economy a number of their members would vote in favour of another reduction in the stimulus possibly by another $10bn with the next meeting on 28 and 29 January.

An improvement in gilt yields would allow providers more room to increase annuity rates or at least recover to the same level at the beginning of January.

News related stories:
Best annuities to benefit if US Federal Reserve tapers stimulus
Annuity rates increase up to 2.8% from Legal & General
UK annuities could rise as market expects Fed to taper stimulus
Best annuity rates from Legal & General reduce 2.3% as gilt yields fall
Related internet links:
Telegraph - Fed expected to cut QE by $10bn
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