15 January 2025 last updated

Gilt yields peak at 5.29pc on inflation fears and fewer interest rate cuts

Gilt yields rise 35 basis rates this month due to inflation worries and interest rates remaining higher.

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Gilt yields peaked at a record 5.29% on fears of higher inflation, strong US economic data and fewer interest rate cuts by central banks during 2025.

Gilt yields rise 35 basis points this month to a record 5.29% on 13 January 2025 as investors demand a higher risk premium for holding government debt.

There is a smaller impact on annuities as providers already increased annuity rates after the Budget last October where the government borrowing is set to rise by a further £50 billion per year.

The increase in gilt yields is driven by fears of higher inflation including the impact of Donald Trump introducing tariffs, stronger than expected US economic data and central banks forecasting fewer interest rate cuts for this year.

Data shows the strength of the US economy adding 256,000 jobs, this is more than expected, resulted in the sell-off of bonds. This means it is less likely the Federal Reserve will cut interest rates with inflation expected to rise in 2025 and these fears are impacting UK gilts.

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Annuity rates increased as much as 105% since the recent low in December 2021 for our benchmark example for a 55 year old using £100,000 to purchase a 50% joint life and 3% escalation income.

This annuity increased 10.3% or £381 pa from £3,687 pa one year ago to a record sixteen year high of £4,068 pa in January 2025.

Fig 1: Chart comparing annuity rates and 15-year gilt yields

The above chart shows our benchmark example for a 60 year old using £100,000 to purchase a single life and 3% escalating income is currently at £4,755 pa and this income is a record +75% higher than the recent low in December 2021.

Higher gilt yields has not increased many annuity rates for different ages and features any further as providers already increased annuities after the budget in October 2024.

Therefore, the above benchmark example remains similar as it was in November last year at £4,754 pa having increased 7.6% since September 2024. Compared to the income of £4,245 pa at the start of 2024, the current income of £4,754 pa is up 11.99% or £509 pa.

Historically when 15-year gilt yields exceed 5.0% they have reduced to more sustainable levels in the following month. Just Retirement is the first to raise annuity rates this year and others such as Scottish Widows and Legal & General are likely to follow.

The next test will be February 2025 when the Federal Reserve and Bank of England decide if they will reduce interest rates. This will determine if providers maintain annuity rates at current levels or reduce annuities if there is an interest rate cut.

Even with a rate cut from the Bank of England, the government extra £50 billion per year of borrowing could keep gilt yields higher than expected and help keep annuity rates high giving people retiring the opportunity to secure lifetime income at these elevated levels.