3 May 2025 last updated

Annuity rates rise 20pc over sixteen months as gilt yields hit record high

Gilt yields rise to 5.29% after Trump tariffs with annuity rates up +20% since December 2023.

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Annuity rates rise 20% driven by record high gilt yields due to Labour budget and Trump tariffs whereas sixteen months ago markets expected falling interest rates.

Just sixteen months ago markets expected central banks to reduce interest rates with falling inflation, reducing gilt yields to 3.82% in December 2023. Since then gilt yields have soared 147 basis points to 5.29% by 9 April 2025.

For annuity rates our benchmark example increased +20.2% or £859 pa to £5,104 pa by May 2025 compared to £4,245 pa in December 2023. This is based on a 60 year old using £100,000 to purchase a single life annuity and 3% escalation basis.

Annuity rates began to increase with the Labour Budget in October 2024 allowing the Chancellor to access a further £50 billion per year in extra borrowing for infrastructure investments.

The 15-year gilt yields jumped 35 basis points higher to 4.72% after the Labour Budget as markets compensated for the extra borrowing and providers reacted with higher annuity rates.

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When Donald Trump became president on 20 January 2025, gilt yields had already reached 5.28% with the prospect of higher inflation for longer, annuity rates continued to rise.

Trump imposed a minimum 10% tariff on all countries, extra tariffs on 60 countries and 145% tariffs on China with reciprocal tariffs on 125% imposed on US goods. This added more pressure on gilt yields to stay high and providers to increased annuities to current record highs.

Trump backed down on the extra tariffs with a 90-day suspension announced on 9 April to avoid a meltdown in the Treasury bond sell-off. Subsequently gilt yields reduced 40 basis points from 5.29% to 4.89% although annuity rates have not reduced.

Depending on age and features, annuity rate increases since the low in December 2021 have been as high as 119% for our benchmark example aged 55 years using £100,000 to purchase a 50% joint life and 3% escalation income.

Fig 1: Chart comparing annuity rates and 15-year gilt yields

The above chart shows our benchmark example for a 60 year old using £100,000 to purchase a single life and 3% escalating income is currently at £5,104 pa and this income is a record +88% higher than the recent low in December 2021.

In the last sixteen months the annuity rates increased +20% from £4,245 pa to the current income of £5,104 pa due to the powerful combination of record high gilt yields and recovering equity markets.

Annuity rates are at a sixteen year high and there is a risk from the Bank of England as interest rates are expected to reduce by -0.25% at the May meeting from 4.50% to 4.25%.

Further reductions are expected if the UK economy does not growth and the market forecasts two further cuts this year. If this happens interest rates will reduce to 3.75% and usually we can expect gilt yields to reduce along with annuity rates.

It is uncertain how the Labour Budget extra borrowing of £50 billion per year, inflation rising higher than the current 2.6% or the Trump trade war especially with China could counter lower interest rates and keep gilt yields higher than expected.

If Trump and the administration negotiate successful trade deals with most countries, market confidence may return and gilt yields fall to more sustainable levels with greater pressure on providers to reduce annuity rates.