29 April 2022 last updated

Annuity rates soar 19pc to highest level in six years as gilt yields rise

Annuities have increase by 19% since January 2021 as 15-year gilt yields rise 156 basis points.

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Annuity rates soar 19% since January 2021 at the height of the lockdown following the rapid rise in gilt yields up 156 basis points of the same period as central banks react to inflation.

Providers have increased pension annuity rates by 18.9% after reaching a low in January 2021 with an 11.9% rise in our benchmark annuity rate already this year.

The rapid rise is due to investors selling bonds and gilts seeking a higher return as inflation around the world rises due to economic activity returning after lockdown at the same time the Russian-Ukraine war forcing commodity prices higher. In the UK the Consumer Prices Index (CPI) is at 7.0% in March 2022 a 30-year high, and in the US inflation has reached 8.5% the highest level in 40 years.

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For our benchmark annuity rate reached in January 2021 was £4,786 pa during the height of the Covid lockdown and has increased by £905 pa to £5,691 pa in April 2022.

The 15-year gilt yields were at a low point of 0.54% in January 2021 and increased to 2.20% by 19 April this year before ending the month at 2.10% a rise of 156 basis points.

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

The above chart shows annuity rates for 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 and compares this to the 15-year gilt yields.

The 15-year gilt yields started to rise rapidly in December 2021 and since January 2021 has increased 15.60%. In contrast, annuity providers were slow to react and remained flat until February 2022. In the last 3 months provider rates have been rising quickly and now exceed the rise in gilt yields since January 2021 up 18.91%.

Since January 2021 our benchmark annuity income increased £905 pa from £4,786 pa to £5,691 pa.

In terms of total income during their life, the Office of National Statistics (ONS) would expect a male to live for 18.5 years and he will have £16,742 more over his lifetime by taking an annuity now compared to a year ago. For a female she can expected to live for 20.9 years increasing her lifetime income by £18,914.

The Bank of England has increased base rates from an all time low of 0.1% up to 0.75% and is expected to raise this again to 1.0% on 5 May 20022.

The unfolding events with the Russian-Ukraine war, extensive lockdowns in China slowing growth could see inflation rise further with higher base rates.

This could result in 15-year gilt yields rising further although investors have already taken account of future rises in base rates by central banks during this year. Annuity rates are likely to remain at current levels with incremental improvements with improvements in gilt yields.