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7 August 2012 last updated
UK annuity rates fails to move higher despite gilt yields recovery

Despite gilt yields increasing providers have not improved UK annuity rates and have preferred to wait for more upward direction.

Yields have recovered from their recent all time low with the 15-year gilt yields increasing to 2.15%, last reached on 10 July.

Despite the increase of 11 basis points for the month UK annuity rates have remained unchanged with providers of standard, smoker and impaired annuities making no moves to make improvements.

In general an 11 basis point increase in yields would result in a 1.1% increase in annuity rates although providers may will delay this improvement. Yesterday Aviva optimised their annuity rates with some decreasing by up to 5%, others increasing slightly or remaining unchanged.

Due to the volatility in the gilt yields most providers will keep annuities at current levels or decrease rates until there is greater direction.

 
No change with annuity rates
 
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Providers optimise annuity rates

In times of uncertain market direction, many providers will change the mix of their UK annuities by reducing the rates in markets they determine to be less attractive while improving annuity rates for markets that are more desirable or profitable.

For the month of July, 90% of uk annuities decreased with standard rates lower by 1.31% and smoker annuity rates lower by 1.73%. Taking into account the current yields of 2.15%, standard annuity rates are likely to decrease by 1.0%, impaired annuities decrease by 0.2% and smoker annuity rates increase by 0.3% at some point this month. Any change in yields around this level will mean providers opting for a waiting game so pensioners retiring cannot expect an increase in annuity rates in the short term. For the latest updates see Annuity Rates 2012.

Pensioner income higher with equities

There has been a positive improvement in equity markets and pensioners that remain invested in equities can expect to see an improvement in their fund values. Since 25 July the FTSE-100 index has increased by £343 or 6.2% to £5,841. This will improve pensioner income in retirement when purchasing an annuity by this amount.

For a male aged 65 this means a fund of £100,000 could have purchased an annuity income of £5,802 pa on 25 July and now assuming the UK annuity rate remains the same, the larger fund of £106,238 has improved the pension income by £362 pa to £6,163 pa. The life expectancy of a 65 year old male is 17.83 years according to the Office of National Statistics (ONS) and this would result in an extra income of £6,454 over the pensioners lifetime.

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UK annuity rates fall to lowest level as gilt yields struggle to improve
Annuities pressured as 15-year gilt yields at all time low
Impaired annuity rates fall 1% after week of declining gilts
Current annuity rates threatened as gilt yields decrease
Annuity Rates
  Age Single Joint  
  55 £4,216 £3,974  
  60 £4,702 £4,423  
  65 £5,453 £5,013  
  70 £6,105 £5,482  
£100,000 purchase, level rates, standard
Unisex rates and joint life basis
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