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| 14 May 2013 last updated |
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| Latest 15-Year Gilt Yields |
Annuity rates are based on gilt yields and in particular the 15-year gilt yield is a key indicator of the likely direction for annuities in the future and should be followed by any pensioner retiring now.
Since the recent financial crisis developed in June 2011 investors have moved their funds to the safety of government bonds and gilts and this has increased the price thereby reducing the yields significantly. The impact on annuity rates has been dramatic although there are signs that gilts are now improving.
After reaching an all time low yield of 2.02% on 2 August 2012 they started 2013 167 basis points lower than the June 2011 level and the direction of gilts will depend on market confidence.
This was boosted with the US fiscal cliff deal in January although other factors such as the Eurozone and the Bank of England's use of Quantitative Easing if the UK economy weakens will impact on annuities.
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How gilt yields influence annuities
Annuity rates are based on the 15-year gilt yields and are an important indicator of the likely direction for annuities. As a general rule a 20 basis point change (or 0.20% change in the actual yield) results in a 2.0% change in annuities.
Last month the the 15-year gilt yields decreased by 11 basis points to 2.22% and this would indicate that pension annuities should fall by 1.1%. On average standard rates were higher by 0.33% with lifestyle enhanced and smoker rates lower by 0.02% so this would indicate some decreases if gilt yields remain at current levels.
For example, in the short term we would expect standard rates fall by 0.77% with lifestyle enhanced and smoker fall by 1.08%. For the latest updates see Annuity Rates Review.
Fig 1 below shows the change in 15-year gilt yields over the last 12 months to date:
Fig 1 above shows the 15-year gilt yields had decreased significantly to a new all time low in August 2012 and have since recovered.
At the start of the month yields were lower by 176 basis points since June 2011. Our benchmark annuity rates example has decreased by 17.3% when we would have expected a reduced of 17.6% suggesting a decrease of 0.3% is possible in the long term, however, short term changes would suggest greater decreases will occur (for more details see the annuity rates chart).
Gilt yields decreased in July 2011 due to the UK government injecting £50 billion of funds into the economy using Quantitative Easing (QE) as well as investor fear over Spain's debt which resulted in their 10-year bond yields increasing to 7.66%. This is beyond the 7% level that would trigger a sovereign bailout as seen in Greece, portugal and Ireland.
At the end of October 2012 the Spanish yields had reduced to 5.5%.
Gilt yields stabilised as the European Central Bank (ECB) announced a plan to do "whatever it takes" to save the euro and buy sovereign debt of countries that need a bailout.
In January 2013 the US managed to negotiate a deal between President Obama and the Republican House of Representatives over the fiscal cliff to avoid the implementation of $600 billion of spending cuts and tax rises. This avoids the US heading back into recession and has boosted market confidence resulting with investors moving funds away from safe havens such as UK government gilts to higher yielding investments thereby reducing the price and increasing the yield of gilts. This is likely to increase annuity rates in due course.
Recent economic issues with Italy's election deadlock, US ongoing tax cut negotiations, the Cyprus bailout deal, US job data and criticism of the ECB plan to save the euro have undermined investor confidence and forced gilt yields lower threatening annuity rates that are likely to decrease.
Fig 2 below shows the daily 15-year Gilt Yield and the increase or decrease from the previous day's close:
| 15-Year Gilt Yields - May 2013 |
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Wed 1st |
Thurs 2nd |
Fri 3rd |
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| 2.21% |
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0.01 |
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| 2.15% |
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0.06 |
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| 2.27% |
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0.12 |
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| Mon 6th |
Tues 7th |
Wed 8th |
Thurs 9th |
Fri 10th |
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| 2.34% |
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0.07 |
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| 2.32% |
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0.02 |
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| 2.34% |
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0.02 |
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| 2.44% |
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0.10 |
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| Mon 13th |
Tues 14th |
Wed 15th |
Thurs 16th |
Fri 17th |
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| Mon 20th |
Tues 21st |
Wed 22nd |
Thurs 23rd |
Fri 24th |
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| Mon 27th |
Tues 28th |
Wed 29th |
Thur 30th |
Fri 31st |
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Fig 2: Daily 15-year gilt yields and changes |
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Fig 2 above shows the 15-year gilt yields started the month at 2.33%. For the latest updates on how this affects annuities see Annuity Rates Review. |
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Age |
Single |
Joint |
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55 |
£4,589 |
£4,247 |
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60 |
£5,088 |
£4,730 |
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65 |
£5,625 |
£5,203 |
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70 |
£6,341 |
£5,771 |
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£100,000 purchase, level rates, standard
Unisex rates and joint life basis |
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