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6 February 2017 last updated

Annuity income increases up to 18% in five months since all time low

Annuity income at retirement has recovered since reaching an all time low in August 2016 after the Brexit vote and is now up to 18% higher following a rise in gilt yields.

There has been a strong recovery in annuity rates since the EU Referendum when 15-year gilt yields reached an all time low in August 2016 of 0.90% rising
85 basis points to 1.75%.

Annuities are mainly based on the change in gilt yields and an 85 basis point rise should result in an 8.5% rise in rates.

Annuity rates have increased by 18.6% for those aged 65 buying a single life, 3% escalating annuity and on average are 12.3% across the board for standard annuities.

Smoker and enhanced annuities are higher by a smaller amount of 8.5% over the same period with the highest rise is 12.5% for those aged 65 buying a single life, level and for those aged 60 buying a 50% joint life, level annuity.

Whereas enhanced rates have matched yields, standard rates have exceeded what we were expecting.

Annuity income increase since all time low
  There has been a 24..2% rise in annuity income those invested before buying their annuity
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Strong rise in rates and equities

Where there is a combination of both annuity rates and equities rising, those people that remain invested before they buy an annuity can benefit significantly.

Annuity rates and FTSE-100 Index
Fig 1: Chart comparing annuity rates and FTSE-100 Index

The above chart shows how the FTSE-100 Index and annuity rates for our benchmark example have increased since August 2016 after the EU Referendum.

Our benchmark example for a person aged 65 with £100,000 buying a single life, level annuity would receive £4,696 pa in August last year rising by 14.86% or £698 pa to £5,394 by the start of February.

For those that remain invested before buying their annuity, the combination of both rising rates and equities has resulted in a significant rise in annuity income.

A pension fund reflecting the FTSE-100 index would have increased by 8.2% since August 2016. For example, a fund value of £100,000 at this time would offer an income of £4,696 pa. The fund would now be £108,199 and with the rise in rates for our benchmark example the income from this fund would be £1,140 pa or 24.2% higher at £5,836 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 £19,836 more over his lifetime. For a female she can expected to live for 20.4 years increasing her income by £23,256.

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Annuity Rates
  Age Single Joint  
  55 £4,273 £4,019  
  60 £4,695 £4,418  
  65 £5,361 £4,913  
  70 £6,172 £5,708  
£100,000 purchase, level rates, standard
Unisex rates and joint life basis
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