Investors seek safe havens from economic fears

The threat of deflation in the Eurozone and increasing likelihood of the European Central Bank (ECB) starting Quantitative Easing with as much as €1 trillion pushed gilt yields and the Euro lower during the month.

This was followed by the shock of Greece calling a snap election and Russia raising interest rates to 17% sending the FTSE to the lowest level for 18 months.

Standard providers fell on average by 1.59% and we would expect to see decrease of 0.41% in the short term and in the medium term of 3 months annuity rates will decrease by 2.75%.

Smoker and enhanced annuity providers decrease their rates by 2.56% on average with an increase of 0.56% possible in the short term and in the medium term of 3 months we can expect a decrease of 1.52%.

Equity markets started at 6,722 and decreased by 156 points to end at 6,566. This represents a 2.3% fall and for people that remain invested will see a fall in their annuity income with the combined fall in rates.

Fig 1 below shows the annuity rates changes for the whole market and the proportion that have either increased, decreased or or did not change. It also shows the range of the changes of the annuity rates over the last month:

Annuity Rates Changes Increase No change Decrease   2%   13%   85% Increases of: up to 1.5%   Decreases of: up to 5.5%

Fig 1: Annuity rate changes for the whole market

Fig 2: Change in standard rates last month compared to gilt yields

Fig 3: Change in enhanced rates last month compared to gilt yields

15-Year Gilt Yields - December 2014 Mon 1st Tues 2nd Wed 3rd Thurs 4th Fri 5th 2.32%   0.03 2.39%   0.07 2.41%   0.02 2.39%   0.02 2.41%   0.02 Mon 8th Tues 9th Wed 10th Thurs 11th Fri 12th 2.30%   0.11 2.29%   0.01 2.32%   0.03 2.31%   0.01 2.22%   0.09 Mon 15th Tues 16th Wed 17th Thurs 18th Fri 19th 2.23%   0.01 2.18%   0.05 2.18% 2.28%   0.10 2.28% Mon 22nd Tues 23rd Wed 24th Thurs 25th Fri 26th 2.26%   0.02 2.28%   0.02 2.31%   0.03     Mon 29th Tues 30th Wed 31st     2.24%   0.07 2.22%   0.02 2.15%   0.07

Fig 2: Daily 15-year gilt yields and changes