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1 March 2013 last updated
Enhanced annuities providers decrease rates by 1.2% as gilt yields fall

As gilt yields fall 33 basis points in the last week the enhanced annuity providers have now reacted with decreases of 1.2% from Just Retirement and Partnership after aggressive competition was reviving the market.

Annuity rates are primarily based on the 15-year gilt yields so any decrease will have an impact on annuities. Yields have reduced from a high for the year of 2.76% last month to 2.43% and this is a significant fall.

Enhanced annuity providers are particularly sensitive to decreases in gilt yields as many of these providers are specialist in the impaired health annuity market and following large increases in rates.

In contrast standard annuity providers have been slow to make improvements and therefore content to hold their rates at current levels. The uncertainty means the market will stall and it is unlikely that annuities can increase in the short term.

Enhanced annuities decrease as yields fall
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US tax cuts of $85 billion undermines annuities

Uncertainty in the US with the sequestration deadline approaching with $85 billion of cuts has seen the 15-year gilt yields reduce by 9 basis points today. These cuts are part of the residual deal reached over the US fiscal cliff and are implemented today and are likely to have an impact on global growth. It is estimated that growth in the US could be only 1.4% if the cuts cannot be delayed. The impact of the cuts may not be as great as feared as Federal departments have funding available from previous fiscal years which they can use first and means the fall in yields could be temporary.

Even so the 15-year gilt yields have reduced by 33 basis points over the last week. As a general rule the fall during the week would result in a 3.3% reduction in annuity rates, however, annuities have not increased as quickly as yields this year so are unlikely to reduce by this amount.

For example, a smoker aged 63 with other medical conditions of high blood pressure and high Cholesterol with a fund of £100,000 could buy a single life, level pension annuity with an income of £6,613 pa and this decreases by £88 pa to £5,856 pa at retirement. The Office of National Statistics (ONS) shows that a male aged 63 will live for 19.3 years and the £88 pa decrease means his lifetime income will be lower by £1,698 while females with a longer life expectancy of 22.1 years have £1,944 less over their lifetime.

News related stories:
Enhanced annuity provider Liverpool Victoria with 2.6% higher rates
Impaired annuity rates higher by 1.6% from Partnership
UK annuity rates rise 1.5% from Legal & General as gilt yields fall
Enhanced annuities increase by 1.4% with more competition
Enhanced annuity rates up 1.3% by Just Retirement
Impaired annuity provider Partnership with 2% increase in rates
Related internet links:
BBC - Sequester deadline looms as US faces $85bn cuts
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