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14 October 2016 last updated

Enhanced annuity rates up 2.4% as gilt yields recover from Brexit

Enhanced annuity rates have increased from providers by up to 2.4% after the 15-year gilt yields recover to 1.46% since reaching an all time low on 0.90% after the Brexit vote.

The 15-year gilt yields have reached a four month high of 1.46% since plummeting to an all time low of 0.90% after the EU Referendum and reaching 1.16% last month.

Annuities are based mainly on these yields and this months rise of 30 basis points would usually result in a 3.0% rise in rates.

Enhanced annuity rates have been below expected levels so the rise by providers such as Just Retirement of 2.4% goes some way to recover the situation.

Investors worldwide have been selling bonds and gilts sending prices lower and yields higher.

The reasons include an expectation the Federal Reserve will increase interest rates before the end of the year, improved economic outlook in Germany and rising crude oil prices pushing up inflation.

Enhanced annuity rates up from Just Retirement
  Enhanced annuity rates are higher by 2.4% as Just Retirement react to recovering 15-year gilt yields
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Annuity rates recovering from all time lows

Annuity rates reached an all time low in August with our benchmark example for 65 year old with a fund of £100,000 buying a single life and level annuity falling to £4,696 pa.

  Benchmark annuity rates and gilt yields
  Apr May June July Aug Sep Oct
Rate £5,311 £5,217 £5,106 £4,915 £4,696 £4,723 £4,836
Yield 2.10% 1.93% 1.41% 1.21% 0.98% 1.16% 1.46%

The above table shows how our benchmark example has changed since April 2016 with an income of £5,311 pa reducing by 11.5% to £4,696 pa. Some of these losses have been recovered as yields are higher by 48 basis points.

The improvement in rates of 3.0% since the lowest point in August 2016still leaves some room for further increases of about 1.8% if the 15-year gilt yields remain at current levels or improve.

In terms of improved income due to the rise, over the lifetime of the annuitant based on the Office of National Statistics (ONS) we would expect a male to live for 17.3 years. This would mean he will have £2,422 more over his lifetime and for a female she can expected to live for 20.4 years increasing her income by £2,856.

Just Retirement has increased their rates by more than our benchmark with some ages and lifestyle conditions such as height and weight by up to 3.5%. Standard providers such as Canada Life have also increased their rates during the month.

Developed world selling bonds

Investors expect both the Bank of Japan and Europe Central Bank to reach the limit of buying long-term government bonds and this is helping a selloff in bonds and driving yields higher.

There is greater pressure for developed world economies to switch from a monetary to fiscal policy to increase growth and inflation as valuations in the bond market are being stretched to the limits with negative interest rates and bond yields.

Inflation is likely to increase with OPEC close to agreeing a deal to cut the supply of crude-oil which may see the price rise from the current level of $50 a barrel.

Even if bonds prices do fall and yields rise there would be a limit to how far this will move from the current 1.46% for the 15-year gilt yields as the global economy remains weak and an aging population will work against yields rising in the long term.

In the short term a further rise annuity rates is possible now that the leading providers have started to increase their rates.

News related stories:
UK annuities could rise 5% as US bond selloff sends yields higher
Retirement annuity rates could fall as Bank starts more QE
Pension annuities lower after Brexit vote and Bank of England action
Annuity income threat as risk of Brexit vote lowers yields and markets
Related internet links:
WSJ - Bond yields rise to a four month high
Financial Times - Treasury yields hit a 4-month high with bond selloff
Annuity Rates
  Age Single Joint  
  55 £4,273 £4,019  
  60 £4,695 £4,418  
  65 £5,361 £4,913  
  70 £6,172 £5,708  
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