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7 June 2018 last updated

Pension annuity rates up over 1% with competition from providers

Pension annuity income is up over 1% as providers are more competitive even though political turmoil in Italy during the month sent gilt yields significantly lower.

Providers have ignored the 31 basis point fall in the 15-year gilt yields at the end of May and maintained the momentum built up during the month with sustained competition from Aviva, Canada Life, Legal & General and Just.

Gilt yields increased to 1.81% during May and collapsed following Italy's political turmoil as investors sold Italian bonds in faviour of safe havens such as US Treasury, German Bunds and UK gilts.

Despite yields reducing to 1.50% the providers increased standard rates ending up 1.36% and enhanced annuities up 1.09%.

Strong gains were made for single life, 3% escalating annuities rising by up to 6.8% for standard rates and up to 5.4% for smoker and enhanced rates.

About two thirds of annuities increased during the month of May and one third decreased but only by -0.5% on average.

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Gilt yields recover after Italian turmoil

The Italian political turmoil was short lived and investors satisfied with the solution reached by the coalition government avoiding a full blown crisis. The 15-year gilt yields have already recovered 15 basis points this month releasing pressure for the providers to take action reducing rates.

  Standard annuity rates and gilt yields
  Dec Jan Feb Mar Apr May Jun
Rate £5,476 £5,546 £5,645 £5,626 £5,613 £5,639 £5,639
Yield 1.50% 1.75% 1.75% 1.58% 1.67% 1.53% 1.68%

The above table compares the change in annuity rates and 15-year gilt yields since December 2017. Providers have maintained rates and for for our benchmark example of a 65 year old with a £100,000 fund buying a single life, level income rates are 2.97% higher.

In terms of the £163 pa rise in lifetime income, the Office of National Statistics (ONS) would expect a male to live for 17.3 years and he will have £2,820 more over his lifetime. For a female she can expected to live for 20.4 years increasing her lifetime income by £3,325.

Over the year annuity rates have increased £367 pa from £5,272 pa in May 2017 and since reaching the all time low in August 2016 of £4,696 pa, rates are 20.0% or £943 pa higher.

This is a considerable recovery exceeding that of the recovery in yields. Gilt yields reduced to an all time low 0.90% during August 2016 following the Brexit vote and have since recovered to 1.68%, up 78 basis points suggesting annuities would increase by only 7.8%.

Over the long term of 10 years our benchmark example has reduced from £7,908 pa in JUly 2008 to £5,639 pa today down -28.7%. This compares to gilt yields lower by -33.0% suggesting that over the long term gilt yields and annuities are more closely matched.

For annuities the providers may be more buoyant with the recover in yields as they return to their previous upward direction.

News related stories:
Gilt yields fall with Italy political turmoil and could hit annuity rates
Annuity rates reduce as interest rate rise unlikely due to weak UK growth
UK annuities risk fall after Trump trade tariffs on Chinese imports
Pension annuity rates surge almost 4% by providers with higher yields
Related internet links:
Guardian - Italy at risk of financial crisis
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