Fig 1: 15-year gilt yields chart showing rates to April 2012
Gilt yields chart at 2.70% on 19th April 2012
Annuity rates are based primarily on the 15-year gilt yields so changes in gilt yields will affect annuities. Fig 1 above shows yields reached a low of 1.43% in January 2012 and have improved as investors move funds from government bonds and gilts to equities. This was due to the US economic recovery and the expectation that Quantitative Easing (QE) in the US would not continue for the moment.
The 15-year gilt yields have reduced significantly since last June due to the financial crisis and this has had the effect of reducing annuity rates. As a general rule a 30 basis point reduction in yields would reduce annuities by 3% although the providers may take time to introduce these changes depending on their own strategies.
The gilt yields chart shows that at the start of April yields are lower by 126 basis points since June 2011. On this basis annuity rates should have reduced by 12.6% although they have only decreased by 10.2% suggesting a decrease of 2.4% is possible in the medium term. In the short term annuities have not increased as much as gilt yields so there is still a potential for annuities to improve. See Annuity Rates 2012 for the latest updates.
Whether the rise in gilt yields will continue will depend on economies improving and investors confidence to invest in equities. There are still uncertainties with the Eurozone and the UK ecomony is weak. If the US economy slows and QE is introduced it is likely that gilt yields will reduce and annuity rates would fall in the medium term.
