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20 February 2013 last updated
Enhanced annuities increase by 1.4% with more competition

Providers Just Retirement and Partnership have increased their enhanced annuities by up to 1.4% as competition increases for the highest rates since gilt yields have improved this year to the benefit of people retiring now.

The providers have taken some time to return to competition after a subdued January following exceptional levels of business with individuals buying annuities to beat the EU Gender Directive deadline introducing gender neutral pricing.

This month has seen more rises in annuity rates than the second half of last year put together and reflects the sever discounting of rates experienced in December coupled with increasing gilt yields.

Enhanced annuities were particularly affected as providers struggled with extremely high volumes of business, reducing their rates beyond the impact of the Gender Directive creating a difference between the level of annuities and 15-year gilt yields.

Enhanced annuities 1.4% increase
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Enhanced annuity gap closes to yields

Annuity rates are primarily based on the 15-year gilt yields and since the beginning of the year these have increased by 45 basis points and since the all time low in August last year yields have risen by 74 basis points.

As a general rule a 45 basis point rise in yields would result in a 4.5% increase in annuities. Up until December enhanced annuities were lower by 4.73% across the board and this is after the increases for females as a result of Unisex annuity rates.

In January providers of both standard and enhanced annuities were reluctant to improve rates until Just Retirement started at the end of the month. In February every couple of days has seen providers improving their rates as the difference between enhanced annuity rates and yields were about 8% so closing this gap.

Impaired annuity providers being more selective

Providers are also optimising their underwriting for medical conditions by targeting medical conditions where they know they can make greater profit margins while not chasing other narrow margin markets where there is traditionally more competition.

For example, the common medical conditions of high blood pressure and Cholesterol were very competitive during last summer as all providers were chasing business volumes so offering higher rates for this low margin market. This has changed as impaired annuity providers can afford to target more serious medical conditions such as diabetes, heart and cancer conditions where their margins are much greater, especially as rates have reduced to such a low level.

QE threat could stop the increase

The Bank of England's Monetary Policy Committee (MPC) meeting has revealed that three members Sir Mervyn King, Paul Fisher and David Miles voted to extend the current Quantitative Easing (QE) programme of £375 billion by another £25 billion.

Part of the reason why gilt yields have increased in the six months has been due to the Bank of England's reluctance to continue with QE so a return to this strategy could easily force gilt yields lower with enhanced annuities following soon after. This could be a quickly changing environment for pension annuity rates and worth following for anyone buying annuities in the second quarter onwards.

News related stories:
Pension annuity rates threat of £175bn QE from Bank of England
Enhanced annuity rates up 1.3% by Just Retirement
Impaired annuity provider Partnership with 2% increase in rates
Impaired annuity rates up 3% as providers race to match rising market
Impaired annuities up 3.5% for second time by Just Retirement
Impaired annuity rates increase by 2.5% from Just Retirement
Related internet links:
Telegraph - Bank of England split on more QE
Guardian - Bank of England governor outvoted on QE boost
BBC - Bank of England Sir Mervyn King outvoted on QE move
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