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8 March 2013 last updated
Buying annuities made safer as 15-year gilt yields recover

After the 15-year gilt yields reduced to 2.43% they have recovered 20 basis points to 2.63% pressure off annuity rates making buying annuities for people safer as providers are less likely to make decreases.

UK annuity rates are essentially based on the 15-year gilt yields as providers use this investment to secure income to pay pensioners in the future.

The recent recovery in yields will allow providers some breathing room to leave retirement annuities at their current levels or possibly increase annuities slightly.

Gilt yields rise when investors move funds to other investments such as equities if they are more confident about the world economy. Today it was revealed the US economy added 236,000 last month while China exports improved on expectation due to strong demand from the US. This helps to improve yields and the annuity income people in the UK can expect in their retirement.

Buying annuities safer as gilt yields recover
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US economy new jobs could improve UK annuities

Investors are focused on the US economy and have reacted positively to the fall in US unemployment to 7.7% the lowest level since December 2008 by adding 236,000 jobs. Equity markets increased with the FTSE-100 rising 44 points to a five year high of 6,483 and the Dow Jones 67 points to 14,397.

The US has added jobs for the past 29 months and indicates that there is strength in the economy to recover to growth. This is in contrast to the eurozone and the UK where the economies are in recession or flat.

During the financial crisis that started in 2008 $600 billion of funds moved from equities to bonds as investor confidence collapsed placing funds in safe havens. At some point this will reverse in what is called the great rotation with funds returning to investments offering a higher return and the US economy is seen as the leading indicator of future economic improvements.

Direction for future annuity rates

The 15-year gilt yields have increased 20 basis points to 2.63% in the last week and as a general rule this would mean annuity rates could increase by 2.0%. In practice as yields are volatile at the moment providers may wait to see the direction of yields in the next week before increasing annuity rates.

Impaired annuity rates increased significantly last month with Just Retirement leading followed by Partnership increasing competition after a slow start to the year after Unisex annuity rates were introduced by the EU Gender directive. There have been some small decreases in rates of about 1.2% and yields have not displaced a significant improvement for the impaired providers to return to their competitive stance of two weeks ago.

Standard annuity providers have been reluctant to increase their rates to the same degree of the impaired providers and they are more likely to make increases to best annuity rates in the short term as they still have room for improvements.

News related stories:
Enhanced annuities providers decrease rates by 1.2% as gilt yields fall
Gilt yields lower as investor fear US Fed comments and Italian deadlock
Impaired annuity rates higher by 1.6% from Partnership
UK annuity rates rise 1.5% from Legal & General as gilt yields fall
Buying annuity boosted as gilt yields rise after EU-US trade deal
Related internet links:
Guardian - US economy makes improvements
Telegraph - US unemployment hits four-year low
BBC - US economy added 236,000 jobs
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