Annuity rates could increase by 2.0%

Providers of enhanced annuities have now reduced rates further than the fall in the 15-year gilt yields and we could now see an increase of up to 2.0% in the short term.

Fig 1: Chart comparing annuity rates and 15-year gilt yields

The above table shows how both yields and annuities have declined during the year with annuities lower by 11.1% and 15-year gilt yields lower by 9.2%. Since March providers have kept rates at a lower level than yields and following the EU Referendum rates have continued to decline.

Since the MPC meeting and decision to hold rates, the 15-year gilt yields have increased about 10 basis points giving enhanced providers the opportunity to improve rates by about 2.0%. Standard rates offer minimal improvements and are about right when compared to yields.

The above table shows our benchmark of a person aged 65 years old with a fund of £100,000 buying a lifetime annuity on a single life, level basis could purchase an income of £5,217 pa before the EU Referendum. This has reduced by £258 pa to £4,959 pa or a fall of 4.94%.

For smoker and enhanced annuity rates the decrease is greater where income was £6,036 pa before the EU Referendum reducing by £467 pa to £5,569 pa or a fall of 7.73%.

If they are invested in equities tracking the FTSE-100 index their fund would be lower by 5.6% reducing the the annuity income by £292 pa to £4,924 pa.

The Bank of England may delay any decrease in interest rates until there is a clear sign the economy is in decline. Unlike the 2008 financial crisis with collapsing equity markets and the global economy entering recession, the Brexit vote is likely to result in a gradual slowdown. The MPC would be more open to taking action in August should conditions do not improve.