21 June 2012 last updated

Enhanced annuity rates fall by up to 3% as gilt yields reduce

Providers reduce enhanced annuities as the threat of more QE and lowering inflation sees gilt yields at lower levels. Smoker and enhanced annuity rates fell by as much as 3% as leading providers Liverpool Victoria and Just Retirement make adjustments across the board. This action follows the fall in 15-year gilt yields during May that have not been fully reflected in the annuity rates and with the gilt yields struggling to recover in June, all providers have reduced their annuities to reflect the reductions. In addition to the smoker and enhanced rates, standard annuity provider Hodge Life have reduced their rates by 1.8%. This will have an impact on smaller funds of £60,000 or less as Hodge Life are more competitive below this level in many cases remains the highest provider as other providers such as Aviva, Legal & General and Canada Life have already reduced their rates.

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The reason annuities are falling

The recently announced stimulus package and Quantitative Easing (QE) by the Bank of England that will buy UK government bonds and gilts increasing the price and reducing the yield will mean lower annuity rates for pensioners retiring now. To date the BoE has injected £325 billion through QE and this is likely to be extended as inflation is reducing at a rapid rate. The Bank of England target is 2.0% for the Consumer Prices Index (CPI) which according to the Office of National Statistics has reduced to 2.8% in May down from 3% in April with the Retail Prices Index (RPI) reducing to 3.1% in May from 3.5% in the previous month.

Gilt yields have reduced today with the 15-year gilt yields lower by 7 basis points at 2.23%. The impact this reduction has on annuities is that a 7 basis point fall roughly translates to a 0.7% fall in annuity rates. Liverpool Victoria educed their rates by about 0.5% whereas Just Retirement, having kept their rates higher as they reached their year end, were more aggressive with decreases of 1.2% to 3.0%. For the latest updates see Annuity Rates Review.

In contrast, Spain's bond auction had an average yield on the five-year bond increasing to a 15-year high of 6.07% compared to 4.96% at the last auction. The yield on the three-year bonds increased to 5.54% from 4.87% and the yield on the two-year bonds more than double from 2.06% to 4.70%.

Smaller retirement funds for pensioners

Pensioners may have also experienced a decrease in their retirement funds if they remain in equities as markets such as in the US have seen a significant fall as poor manufacturing data in Europe, US and China suggests a slow down in the world economy. The FTSE-100 index is 56 points lower at 5,566, the Dow Jones is 251 points lower at 12,573 and Europe is down by about 0.5%.

To counter the falls in equities if pensioners do suffer from from lifestyle medical conditions such as high blood pressure, Cholesterol, are a smoker or are overweight they can receive higher incomes than a standard rate from an enhanced annuity. If suffer For more more serious health conditions such as diabetes, heart conditions or cancer they could qualify for an impaired annuity offering 40% higher incomes.

Other threats to people retiring in the next month is that Spanish banks may require more funds than the 100 billion euros already agreed by the Eurozone and this may amount to a further 62 billion euros. Should this occur it is likely that equities would fall further and so pensioners retiring in the next month should convert their funds to cash to protect against further decreases in the fund value. Equity markets are likely to remain volatile so converting to cash removes one aspect of the uncertainty when buying a pension annuity.