24 July 2012 last updated

UK annuities fall up to 1.9% as Spain's bonds yields soar

Standard and smoker annuity rates reduced by up to 1.9% as providers react to the deepening Eurozone crisis and Spain's bond yields rise to critical levels above 7.5%. Providers in the UK have reduced their annuity rates across the board as uncertainty in the Eurozone intensifies with Spain's 10-year bond yields reaching 7.59%. It is generally agreed that a yield above 7% is unsustainable and other countries such as Portugal, Greece and Ireland required a bailout at this level. After three weeks of decreasing gilt yields and the 15-year gilt yield decreasing from a high of 2.31% at the beginning of the month to 2.04% today. This is a 27 basis point fall in yields and as a general rule this would mean a 2.7% reduction in annuity rates. Today providers of standard and smoker UK annuities have reduced their rates by as much as 1.9%.

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Providers react and reduce UK annuities

The leading providers Legal & General reduced their rates by 0.5% and 1.9% with Canada Life by about 1.1%. The largest decrease was from Legal & General for females aged 65 with a reduction of 1.9% and males aged 65 with a reduction of 1.2%. Just Retirement also reduced their annuity rates for smokers with a fall of 1.4%. They are the leading provider for female and joint annuities aged 65 with the majority of the leading pension annuity rates offered by Liverpool Victoria.

Impaired annuities have been reduced selectively by providers such as Partnership, Liverpool Victoria, Just Retirement, Aviva and MGM Advantage reducing the rates for some medical conditions and in some cases increasing rates for markets they wish to remain competitive. All providers have limited margin to improve their annuity rates and any further decline in 15-year gilt yields are likely to result in a fall for impaired annuities.

In the Eurozone Greece is struggling to meet the terms of their bailout agreement which means they may not receive the final part of the 31.5 billion euro bailout. It was only in March that the rescue package was agreed with 130 billion bailout and Greece is facing a continued recession and the possibility of leaving the euro.

Equity markets were lower today with the FTSE-100 index falling to 5,499 down 35 points, the Dow Jones closing at 12,617 down 104 points and European markets between 0.5% and 3.5% lower. The combined fall of UK equities by 0.6% and annuities by 1.2% would mean that a male pensioner retiring with a fund remaining invested in equities of £100,000, aged 65 and buying a pension annuity would receive £109 pa less than the day before with their income reducing from £5,962 pa to £5,853 pa.