19 April 2012 last updated

Smoker annuity rates fall despite rise in gilt yields

Providers of smoker annuities are aggressively reducing their annuity rates even though gilt yields have continued their rise during the week. Smoker annuity rates have reduced by between 1.0% and 2.0% with the largest decreases from Liverpool Victoria and smaller decreases of 0.3% from Reliance Mutual. The decreases in annuities were despite an increase in the 15-year gilt yields over this week of 13 basis points to 2.70% of which 3 basis points was the increase for today. Generally a 13 basis point rise in yields would result in a 1.3% increase in rates. This means the gap between gilt yields and smoker annuities is widening and these rates should be higher in the short term by 3.0%. This discrepancy is greater if taken over a longer time period of three months and is 4.5%. See Annuity Rates Review for the latest updates.

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Providers aggressive at reducing smoker annuity rates

Smoker annuity providers are being aggressive at reducing their rates compared to standard pension annuities where providers are maintaining rates closer to the changes in the gilt yields. The difference between rates and yields is much smaller although we would still expect standard annuity rates to increase by 0.7% in the short term and by 1.5% in the medium term. Impaired annuities have been volatile over during this year and have followed the gilt yields closely so there is not a great differential.

The increase in UK 15-year gilt yields may be due to an unexpected strong demand for Spanish bond auctions. Investors purchased all the 2.5 billion euros of Spain's bonds with the 10-year bonds offering a yield of 5.74% which is a higher yields than earlier in the year. The demand was double the actual amount issued so there is confidence in Spain despite the concern over the economy. The yields of Spanish 10-year bonds is 2.7 times greater than Uk government 10-year bonds so if investors at the moment must perceive this risk as being acceptable after measures taken to increase the rescue fund.

Even so this position could change quickly and the International Monetary Fund (IMF) has already warned that the debt crisis in the Eurozone may return. The IMF is still trying to build a larger emergency fund with more than $400 billion in resources to provide a global firewall against sovereign default, although in practice it is the Eurozone that is most likely to need the fund as concern increases for Spain's banks. UK Providers may be negative about gilt yields although smoker annuity rates appear to be poor value at the moment.