Annuities lagging behind gilt yields

Standard annuity rates have been lagging behind gilts for most of the year with providers resisting the recovery in the 15-year gilt yields since reaching an all time low in January of 1.68%.

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

The above chart is based on our benchmark example for a 65 year old with a fund of £100,000 buying a single life, level annuity. The gap suggests rates could increase by up to 3.67% and if this was the case it would mean a rise of £210 pa from the current level of £5,738 pa to £5,948 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 £3,633 more over his lifetime. For a female she can expected to live for 20.4 years increasing her income by £4,284.

Volatility expected to continue

The US Treasury market has been tethered to Europe since the ECB launched their €1.1 trillion quantitative easing programme which buys €60 billion of bonds per month into the eurozone.

Even though US yields are higher than Europe, 10-year notes at 2.38% compared to German Bunds at 0.90%, Treasury notes are still following. This is contrary to the fundamentals of the US market and if yields continue to rise past 2.40% they could continue towards 2.60%.

The ECB have not yet suggested they will take any action to slow down the recent European rates rise.

In the short term we could see further rise in pension annuities off the back of the bond sell offs in the EU and US although there could be volatility in the markets during the summer with providers quick to lower rates at the first sign of weakness.