Standard rates lagging behind yields

Standard pension annuities have been lagging behind the 15-year gilt yields for the past year. Our benchmark example below shows how the rate is at the lower end compared to any of the past 7 months, even though gilt yields higher.

In the short term we would expect annuities to increase by a further 0.41% but over the medium term of three months this could be an increase of 1.54% when compared to yields.

For our benchmark example of a person with £100,000 buying an annuity on a single life, level basis this would add £93 pa to £6,130 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 £1,608 more over his lifetime. For a female she can expected to live for 20.4 years increasing her income by £1,897.

Global uncertainty keeping rates low

The recent crisis in the Ukraine is likely to keep rates artificially low in the short term although markets are relieved that Europe and the US are more inclined to talks than escalating the response. At the moment more damage has been sustained by the Russian stock market with one of it's largest one day falls and currency forcing Russia to raise interest rates from 5.5% to 7.0%.

There remains positive economic data with the US economy adding 175,000 jobs suggesting the Federal Reserve will continue to taper the stimulus package. The stimulus package is now at $65 billion having been reduced twice by $10 billion from the previous high of $85 billion.

This would mean less funds buying bonds, lowering the price and increasing the yields in the future to the benefit of people buying pension annuities.