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2 April 2013 last updated
Impaired annuities reduce 1.5% from leading providers on poor yields

The leading impaired annuity providers have reduced their rates on average by 1.5% although some are lower by up to 3.5% as they react to gilt yields reducing from a high for the month by 30 basis points.

Impaired annuity
rates are based on the 15-year gilt yields and any change will lead to a change in annuities. Enhanced annuity providers are particularly sensitive to these fluctuations and can often make adjustments to their rates on a daily basis.

As a general guide a 33 basis point fall in yields would result in a 3.3% decrease in annuity rates and providers may place more emphasis on some medical conditions than others.

This could mean certain preferred medical conditions remain the same or even increase while others decrease by more than the fall in yields. In contrast standard annuities increased last month as improvements have lagged behind the rise in gilt yields this year and are less volatile.

 
Impaired annuities reduce 1.5pc from leading providers
 
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Gilt yields continue to fall with economic fears

Investor confidence has been at a high at the beginning of the year moving funds away from the safety of US Treasury notes, UK government bonds and gilts and German Bunds to equities. This has the effect of lowering the price of gilts and increasing yields up to 2.76% in February, up 45 basis points on the year.

This helped pension annuity rates to recover and increase with genuine competition returning to the annuity market, in particular for impaired annuities.

This confidence was undermined with the Cyprus bailout deal and concern that the European Central Bank (ECB) pledged to do "whatever it takes" to protect and bailout member states comes with unexpected strings, such as expecting savers to cover part of the costs.

The concern here was this practice could be applied to other countries such as Spain and Italy. As investor confidence evaporated and funds moved back to safe havens, yields have reduced back to 2.33% halting competition from annuity providers.

US equity markets reach an all time high

The Dow Jones index has reached an all time high up 82 points at 14,662 with the S&P 500 closing at 1,570. This high follows a 3% rise in manufactured goods for February with durable goods orders up 5.6%, aircraft orders doubled and 14% higher orders for motor vehicles.

The US economy is an important indicator for future global growth and stability and investors confidence is closely linked to the economic data from the US. As this closely influences gilt yields it can indicate direction changes in annuity rates over the next few months.

In the UK the manufacturing sector continues to contract with data released today although this has not halted the FTSE-100 index which increased 79 points to close at 6,491. For people retiring and remaining invested before buying their annuities the recent increases in equities has made a significant difference to their pension funds and annuity income.

For example a 65 year old male retiring in October 2011 with a fund of £100,000 could buy an annuity for £6,093 pa on a single life, level basis. Annuity rates have reduced by £524 pa or 8.6% over this time, however, as equities are up by 31.2% the pension fund could have improved to £131,200 which would provide an retirement annuity income of £7,306 pa based on current rates. This means that the income from their fund would have actually increased by £1,213 pa or 19.9% over this period.

News related stories:
Latest annuity rates may fall 4% as gilt yields collapse after US jobs data
Pension annuities risk with gilt yields fall as Cyprus reject bailout deal
Gilt yields fall after US budget cut and Cyprus bank account fears
Annuity rates for March 2013 with impaired annuities lower
Enhanced annuities providers decrease rates by 1.2% as gilt yields fall
Enhanced annuity provider Liverpool Victoria with 2.6% higher rates
Annuity income lower as markets and gilts fall on Italy election deadlock
Related internet links:
BBC - Dow Jones and S&P climb to new heights
BBC - US factory orders rise thanks to aircraft sales
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