Standard rates up even though bond yields at lowest levels since 1897

Updated: 31 December 2011

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DECEMBER 2011 REVIEW: With UK government bonds at the lowest level since 1897 the 15-year gilt yields have reduced to 2.46% a fall of 24 basis points this month. Even so standard annuities have managed to increase by an averag eof just over 1% although smoker pension annuities have decreased by the same amount. The general uncertainty in the Eurozone's ability to manage the debt crisis and establish the member treaty for greater controll of soverign spending has seen investors move investment to safe havens such as UK government bonds and gilts.

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Annuity Rates Market Changes Increase No change Decrease   43%   9%   48% Increases of: 0.2% - 2.5%   Decreases of: 0.2% - 1.6%

Fig 1: Annuity rates changes for the whole market ending Dec 2011

Annuity Rate Changes - Standard   Male * Female * Joint Level   0.41%   0.90%   1.23% Level + 10 yr 100% joint **   1.38%   1.11%   1.74% 3% escalation   0.74%   1.35%   0.88% Annuity Rate Changes - Smoker   Male Female Joint Level   1.30%   1.10%   0.98% Level + 10 yr 100% joint **   1.12%   1.45%   0.85% 3% escalation   1.43%   0.96%   1.09%

Fig 2: Latest annuity rates change for 1 month ending 31 Dec 2011

* Male and female on a single life basis only

** Joint life option is level, 100% spouse benefit and no guarantee

Standard pension annuities have increased across the board at the end of December 2011 with the rate rises from Legal & General and Canada Life resulting in an average increase of 0.4% to 1.7% although there was some variation around these figures for particular markets. The biggest increases were for females aged about 75 as well as joint life level and with a 10 year guaranteed period but not escalating rates. For single males with 10 year guaranteed period and 3% escalation there were increases but not level rates.

For smoker pension annuity rates the reduction was similar across the the board averaging 0.8% to 1.5% with some variations but in general a more consistent fall for all annuity rates.

A 24 basis point reduction in the 15-year gilt yields for December should result in roughly a 2.4% decrease in annuity rates. Over two months this reduction is 44 basis points or roughly a 4.4% decrease in annuities. Looking at the reductions over two months, the standard rates have decreased by only 1.2% and would suggest that these annuities will fall by an average of 3.2% if gilt yields remain at the level at 31st December of 2.46%.

Annuities for smokers have decreased by 3.2% over the last two months so this would suggest they are likely to decrease by a further 1.2% if gilt yields remain at their current levels.

The impaired annuity rates were more stable during December and many providers after reducing their rates in November found they had extra margin in December and so were not inclined to make reductions to their annuities.

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