Annuity rates are at risk of falling as gilt yields reduce to the lowest levels since March due to rising cases of Covid-19 threatening the global economic recovery.
With greater freedom of movement globally the number of Covid-19 cases is beginning to increase and investors are concerned this will slow the economic recovery.
In addition the Federal Reserve are likely to keep rates at record zero percent continue bond buying until 2022 with investors moving funds to the safety of gilts and bond.
The 15-year gilt yields are lower for the month reducing 6 basis points from 0.40% to 0.32% the lowest level since the start of lockdown in March. There is a risk that providers could reduce annuity rates if gilt yields remain at the current levels.
Annuity rates and gilt yields
Jan
Feb
Mar
Apr
May
Jun
Jul
Rate
£5,032
£5,027
£4,853
£4,926
£4,920
£4,825
£4,843
Yield
0.76%
0.66%
0.60%
0.42%
0.37%
0.40%
0.34%
Fig 1: Chart comparing standard annuity rates and 15-year gilt yields
The above chart and table shows that although annuity rates have been impacted by the Coronavirus lockdown from March 2020, income remains similar to the level one year ago.
In contrast, the 15-year gilt yields have decreased 42 basis points over the year from 0.76% to 0.34% and central banks reduce rates to all time lows and investors seek safe havens with the uncertainty over Covid-19.
The US economy has shrunk by about 34% in the second quarter fro April to June 2020 and the jobless numbers have also started to increased suggesting it is unlikely that the Federal Reserve will change the strategy of low rates and bond buying.
Over the year there is now a wide gap between where gilts are compared to annuity rates. From the chart over the year annuities are lower by only -0.45% whereas gilt yields are down by -3.70%.
This could mean providers reduce annuities although perhaps competition for business at an uncertain time during the Coronavirus pandemic will continue to helped keep income at current levels.
