Providers have increased retirement annuity rates by up to 2.4% as gilt yields bounce 22 basis points as investors sell-off bonds and gilts at the end of the month.
Retirement annuities have increased for the second month in a row with standard rates 1.47% higher and impaired annuity rates up by 2.27% since the end of June.
For the first time since lockdown the 15-year gilt yields has ended the month at a similar level before the Coronavirus impact on the economy rising 22 basis points to 0.56% although remain historically low.
Higher gilt yields have been helped by the general a large supply of government debt from developed countries and subsequent sell-off of bonds and gilts at the end of the month.
Statements from the Federal Reserve may have assisted in this process as it will allow inflation to exceed 2% before applying monetary policy which would have a greater impact of eroding returns on long dated debt for investors.
Annuity rates and gilt yields
Fig 1: Chart comparing standard annuity rates and 15-year gilt yields
Annuity rates have reduced -4.61% during 2020 to date for our benchmark example compared to the 15-year gilt yields down -5.10%. Providers have not followed lower gilt yields since the start of lockdown with a convergence occurring in August.
Annuity rates are mainly based on the 15-year gilt yields and providers may feel they can increase annuity rates still further based on improvements in yields during the month.
The chart and table are based on our benchmark example of a person aged 65 year old with a £100,000 fund. At the start of January 2020 they could purchase an annuity on a single life, level basis with retirement income of £5,098 pa and this has reduced by 4.6% or -£235 pa a year later with the current income of £4,863 pa.
In terms of total income during their life, 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.
Although pension annuity rates are -4.61% lower when compared to the start of the year, our benchmark is similar to August last year when the rates were £4,891 pa or £28 pa higher. There could be further small rises in rates for September if yield remain at current levels or are higher.