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4 September 2015 last updated

Gilt yields and equities fall as Federal Reserve unclear about rate rise

The 15-year gilt yields reduced 16 basis points this month to 2.12% with further falls in equities as the Federal Reserve decision about raising interest rates is finely balanced even after positive data for employment.

Annuity rates are mainly based on the 15-year gilt yields and a 16 basis point fall would result in a 1.6% reduction in rates at some point in the future.

Recent US employment figures show 173,000 new jobs have been created and unemployment falling to 5.1%, the lowest level since April 2008.

The Fed has said in July this year they would look for 'some' further improvement in the the jobs market before raising interest rates. However, it remains finely balanced whether a decision will be made for a rise at the meeting on 16 September.

The recent concern of the Chinese economy slowing would have a limited impact on US growth according to Jeffrey Lacker a member of the Fed's rate-setting panel.

Gil yields and equities fall
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Annuity rates under pressure for a fall

This summer annuity rates have been increasing with more competition and rising gilt yields. Since February our standard rates benchmark example for a 65 year old with a fund of £100,000 buying a single life, level annuity has increased by £353 pa or 6.4% to £5,847 pa.

Since reaching a high of 2.52% at the end of July yields have reduced to the current of 2.12% while standard rates have remained unchanged as shown in the table below, suggesting a fall in annuities could occur if yields do not increase.

  Benchmark annuity rates and gilt yields
  Mar Apr May June July Aug Sep
Rate £5,485 £5,507 £5,738 £5,781 £5,847 £5,847 £5,847
Yield 1.96% 2.18% 2.28% 2.40% 2.52% 2.28% 2.12%

Smoker and enhanced annuities have reduced by 0.94% on average last month and have made a start to reduce the difference with gilt yields.

Equities fall on US data

As with the 15-year gilt yields, equities reduced with the FTSE-100 index lower by 151 points to 6,194. Despite the jobs figures being quite good they failed to give a clear cut indication of what the Federal Reserve are likely to decide about interest rates.

US interest rates remain at an all time low of 0% and markets believe there is a 34% chance the Fed will increase rates. This is an increase from the 30% expected before the employments figures were released.

The jobs figures for August of 173,000 have traditionally underestimated the actual amount and are revised upwards by an average of 58,000 jobs in the month following. Both the jobs figures for June 245,000 and July 245,000 were revised up to these levels adding an additional 44,000 jobs between them in total.

The impact of lower equities would impact pension funds significantly that remain invested and annuity falling would further lower the income from annuities.

News related stories:
Pension income lower as FTSE-100 index falls with Chinese slowdown
Best annuities could rise as Fed delays raising interest rates
Pension income higher as FTSE-100 index reaches all time high
Related internet links:
Guardian - US economy adds 173,000 jobs
BBC - FTSE 100 index drops after US jobs report
Telegraph - Fed stuck in rate rise dilemma
Annuity Rates
  Age Single Joint  
  55 £4,358 £4,209  
  60 £4,839 £4,644  
  65 £5,613 £5,193  
  70 £6,292 £5,860  
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