Pension annuity rates lower again as yields continue to plummet


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9 January 2015 last updated

Pension annuity rates lower again as yields continue to plummet

15-year gilt yields chart

Based on figures for December 2014

Providers of pension annuities have lowered rates following the continued fall in the 15-year gilt yields. Economic uncertainty with the falling oil price, deflation in the Eurozone and threat of ECB starting QE has sent investors to safe havens such as gilts.

Standard rates:

1.59%

Enhanced rates:

2.56%

Gilt yields:

20 basis point

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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

13%

85%

Increases of:
up to 1.5%

Decreases of:
up to 5.5%

Fig 1: Annuity rate changes for the whole market

The majority of annuity rates decreased with only 2% rising, 13% remaining unchanged and 85% decreasing.

What happened to standard rates

Below shows a fund of £100,000 with the change in standard annuity rates for single and joint pensioners from age 55 to 75 with different annuity options such as level or escalating over 1 month compared to gilt yields:


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

Standard annuities have continued to decreased across the board with the highest fall of 3.6% for 50% joint life aged 55 and up to 3.9% for 100% joint life age 55 to 75. The only increases for single life annuities aged 60 with 3% escalation of up to 1.5% but these were rare events.

What happened to enhanced rates

Lifestyle smoker and enhanced annuities have decreased significantly across the board for all types of annuities and ages.


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

For enhanced and smoker rates all decreased during the month with the highest fall of 5.5% for single life aged 65 with 3% escalation with virtually all falling by at least 2.0% or more. As with previous month providers were more aggressive at decreasing their rates with an average of 2.56% exceeding the change in yields of 2.0%. For the latest updates see Annuity Rates Review.

Changes to the 15-year gilt yields

The yields change for the month was from 2.35% to 2.15% or 20 basis points. Fig 2 below shows the daily 15-year gilt yields and the increase or decrease from the previous day's close:

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

News related stories:

Annuity income now 10% lower after falls in FTSE index and gilt yields

Annuities to fall when the ECB's €1 trillion stimulus plan starts

Annuity Rates

Age

Single

Joint

£6,361

£5,898

£6,842

£6,244

£7,474

£6,843

£8,405

£7,660

£100,000 purchase, level rates, standard
Unisex rates and joint life basis

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