Annuities are set to rise over 3pc after gilt yields gain 35 basis points in the last month as investors sell safe-haven bonds expecting a rise in future inflation.
The 15-year gilt yields have increased 35 basis points in 2021 to 0.75% as investors expect inflation to rise in the next decade as global economies recover from the effects of Covid-19 lockdown.
Other factors sending yields higher are the US Federal Reserve making it easier for small businesses to access loans from its lending programme, the $1.9 trillion fiscal stimulus and new vaccines expected to accelerate the recovery for consumer spending.
As annuity rates are based mainly on the 15-year gilt yields recent gains in yields could result in annuities rising by up to 3.5% in the short term.
Annuity rates and gilt yields
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Rate
£4,863
£4,848
£4,867
£4,867
£4,800
£4,786
£4,786
Yield
0.56%
0.45%
0.49%
0.53%
0.40%
0.54%
0.75%
Fig 1: Chart comparing standard annuity rates and 15-year gilt yields
The chart and table are based on our benchmark example of a person aged 65 year old with a £100,000 fund with a level annuity income of £4,786 pa for a single life.
From June to December 2020 annuities were tracking gilt yields closely and have diverged since January 2021. This suggest providers will increase annuity rates soon if yields remain at or above the 0.75% level.
With an expectation of rising inflation due to continued stimulus and consumer spending to increase with a recovery from lockdown it is likely the 15-year gilt yields can remain at this current higher level.
Many people planning to retire in 2020 experienced falling equity values. The announcement of successful vaccines in November last year has seen the value of pension funds recover and this will also mean more income from annuities.
The combination of investor optimism for equities due to higher consumer spending and higher gilt yields
due to higher inflation could significantly improve the potential for income from pension funds in the next six months.
For investors that can accept investment risk and are considering flexi-access drawdown, a portfolio of fixed interest and equities could offer growth in the fund value over the medium term while taking an income.
