Annuity rates recovering from all time lows

Annuity rates reached an all time low in August with our benchmark example for 65 year old with a fund of £100,000 buying a single life and level annuity falling to £4,696 pa.

The above table shows how our benchmark example has changed since April 2016 with an income of £5,311 pa reducing by 11.5% to £4,696 pa. Some of these losses have been recovered as yields are higher by 48 basis points.

The improvement in rates of 3.0% since the lowest point in August 2016still leaves some room for further increases of about 1.8% if the 15-year gilt yields remain at current levels or improve.

In terms of improved income due to the rise, over the lifetime of the annuitant based on the Office of National Statistics (ONS) we would expect a male to live for 17.3 years. This would mean he will have £2,422 more over his lifetime and for a female she can expected to live for 20.4 years increasing her income by £2,856.

Just Retirement has increased their rates by more than our benchmark with some ages and lifestyle conditions such as height and weight by up to 3.5%. Standard providers such as Canada Life have also increased their rates during the month.

Developed world selling bonds

Investors expect both the Bank of Japan and Europe Central Bank to reach the limit of buying long-term government bonds and this is helping a selloff in bonds and driving yields higher.

There is greater pressure for developed world economies to switch from a monetary to fiscal policy to increase growth and inflation as valuations in the bond market are being stretched to the limits with negative interest rates and bond yields.

Inflation is likely to increase with OPEC close to agreeing a deal to cut the supply of crude-oil which may see the price rise from the current level of $50 a barrel.

Even if bonds prices do fall and yields rise there would be a limit to how far this will move from the current 1.46% for the 15-year gilt yields as the global economy remains weak and an aging population will work against yields rising in the long term.

In the short term a further rise annuity rates is possible now that the leading providers have started to increase their rates.