Annuity rates drifting lower

Since the start of the year annuity rates have been strong with the longer term expectation of ECB indicating the end of the asset purchase programme expected now in the summer of 2019.

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

The above chart compares the change in annuity rates and 15-year gilt yields since January 2018. Even though gilt yields are lower by -1.80% since the start of the year providers have maintained rates in positive territory.

Standard pension annuities are lower by -1.10% during the month and smoker & enhanced rates are lower by a greater amount of -1.42%.

For our benchmark example for smoker & enhanced rates, a 65 year old with a £100,000 fund the largest fall was for those buying an annuity with 3% escalation on a single life basis can expect income to reduce by -5.41%. This has reduced by -£235 pa from £4,578 pa to £4,343 pa over the month.

Over the month this -£235 pa fall will impact lifetime income. The Office of National Statistics (ONS) would expect a male to live for 18.5 years and he will have -£4,347 less over his lifetime. For a female she can expected to live for 20.9 years decreasing her lifetime income by -£4,911.

There could be further uncertainty in the the short term as US tariffs against China take effect resulting in a deteriorating economy. Already the equity market in China is -31% down from the peak and the ripple effect of higher cost of goods could see more volatile equity markets. Investors seeking the safety of bonds and gilts would see yields fall along with pension annuities.