Providers to reduce rates by up to 2.0%

Providers are likely to reduce annuity rates by up to 2.0% on average although some rates from enhanced providers could be reduced further.

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

The above table shows how both yields and annuities have declined during the year with annuities lower by 11.8% and 15-year gilt yields lower by 13.6%.

This would suggest further falls in annuity income and as the momentum for the 15-year gilt yields is firmly down, providers may be more aggressive at lowering their rates in the short term.

Bank of England struggles to buy gilts

The Bank of England attempted to buy £1.17 billion of government gilts on 9 August but only managed to find £1.11 billion, a shortfall of £52 million.

This was the first time since the Bank started quantitative easing in 2009 that it was unable to find enough investors willing to sell long-dated gilts of 15-years or more which are valuable investments for pension funds. This resulted in gilt yields reducing, such as the 15-year gilt yield eventually falling to a record low of 0.90%.

However, on 10 August the Bank received offers exceeding their target of £1.17 billion by a cover ratio of 4.71 times for long-dated bonds of 7-15 years.

The Bank will focus it's attention on short-dated bonds typically used for mortgages and bank loans to reduce interest rates and stimulate the economy by increasing spending and creating jobs.

Quantitative easing has been used before by the UK between 2009 and 2012 with £375 billion of new money. In the US the Federal Reserve bought a total of $3.7 trillion bonds between 2008 and 2015 to stimulate the economy with the EU starting QE in January 2015 with $600 billion of new money to date and will continue until at least March 2017.

Annuity rates are likely to remain at current low levels for the next year or until confidence about the UK economy returns following the Brexit vote.