Standard annuities also likely to fall

So far standard annuities have not reacted significantly to changes in the yields and are lower by only 0.69%. This would suggest that they could fall by a further 2.99% before the end of the year.

The above table shows that our benchmark example has virtually not changed yet yields are lower by 31 basis points. This suggests a fall of 3.1% in annuity rates is likely.

Our benchmark example for a person aged 65 with a fund of £100,000 could purchased a single life, level annuity with an income of £5,900 pa now. By reflecting the reduction in yields this figure will reduce by £177 pa to £5,723 pa.

In terms of lifetime income, the Office of National Statistics (ONS) would expect a male to live for 17.3 years and he will have £3,062 less over his lifetime. For a female she can expected to live for 20.4 years decreasing her lifetime income by £3,610.

Gilt yields could fall further

There remains the risk that yields will continue to fall as the European Central Bank (ECB) considers a €1 trillion stimulus programme to keep the Eurozone out of deflation.

This is expected to send the yields on German 10-year Bunds lower than the ultra low Japanese 10-year bond yields, currently only 0.45%. The demand for sovereign bonds from the ECB will send the price of all bond assets higher and the yields lower during 2015.

In the UK investor activity in buying government bonds and gilts is occurring in anticipation of the ECB quantitative easing programme and it is likely to send annuity rates lower.

People buying annuities may have to wait a number of years or consider an alternative such as a fixed term annuity for three years or more allowing time for the ECB stimulus to end and rates to rise or pension drawdown using a protected growth fund to reduce volatility.