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5 April 2014 last updated
Mixed annuity rates as radical changes announced in the Budget
15-year gilt yields chart
Based on figures for March 2014
15-year gilt yields March 2014

Radical changes in the Budget has resulted in mixed changes for annuities as the chancellor George Osborne allow people to take their pension as a cash fund rather than buy an annuity.

Standard rates:  
annuity rates up 0.73%
Enhanced rates:  
annuity rates down 1.54%
Gilt yields:  
  no change

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Budget changes will improve provider offers

The 15-year gilt yields were unchanged after a quiet month with a narrow range as with the previous month. As a general rule a 10 basis point rise would result in a 1.0% rise in annuity rates.

Despite this providers have been changing their rates as the Budget is changing the market after the radical move to allow people to take their full fund as a cash sum less tax at their marginal rate. This will not become effective until April 2015 and the government has entered a consultation period with the industry which could result in alterations to some of the details.

Standard providers increased their rates by 0.73% and we would expect so see a decrease of about 0.73% in the short term but in the medium term of 3 months they can decrease by 1.74%.

Smoker and enhanced annuity providers decreased their rates by 1.54% on average and an increase of 1.54% is possible in the short term but in the medium term of 3 months the decrease of 2.92%.

The Budget changes are likely to lead to greater competition as the annuity market reduces in size. The chancellor also extended the Triviality rules allowing people with small funds to take these as a cash fund less tax at their marginal rate. Previously, where the value of all pensions is less than £18,000 a person could take their fund(s) and this has been increased to £30,000.

Equity markets started at 6,810 and decreased 212 points to end at 6,598. This represents a 3.11% fall and for people that remain invested have seen their fund decrease in value and for those buying smoker and enhanced annuities this has further reduced their retirement income with lower annuity rates.

Fig 1 below shows the annuity rates changes for the whole market and the proportion that have either increased, decreased or or did not change. It also shows the range of the changes of the annuity rates over the last month:

Annuity Rates Changes
Increase No change Decrease
annuity rates increase   30%
annuity rates no change   14%
annuity rates decrease   56%
Increases of:
0.2% - 2.3%

  Decreases of:
  Fig 1: Annuity rate changes for the whole market

For this month the majority of the decreases were enhanced and smoker annuities with falls of up to 2.8% in particular for older annuitants aged 70 and over.

Virtually all the increases were for standard rates by up to 2.3% in contrast to smokers and enhanced although the same age group of for 70 and over experienced the biggest gains.

What happened to standard rates

Below shows a fund of £100,000 with the change in standard annuity rates for single and joint pensioners from age 55 to 75 with different annuity options such as level or escalating over 1 month compared to gilt yields:

Standard annuity 1 month changes
Fig 2: Change in standard rates last month compared to gilt yields

Standard annuities increased more than gilt yields as providers adjust their rates after the Budget. In the short term standard rates are ahead of yields but over six months there does appear to be room for improvement by up to 3.48%.

What happened to enhanced rates

Lifestyle smoker and enhanced annuities have decreased in line with the fall in gilt yields and in particular for joint life rates.

Enhanced annuity 1 month changes
Fig 3: Change in enhanced rates last month compared to gilt yields

For enhanced and smoker annuities providers have over reacted by lowering their rates so there is room for improvements of about 1.0-2.0% across the board.

Impaired providers have also decreased their rates and changes in the Budget are likely to make them review their offerings with improvements. See Annuity Rates Review For the latest updates.

Changes to the 15-year gilt yields

The US Federal Reserve has reassured investors that there will not be any sudden change in the stimulus policy and that there will be a steady decline over time.

The stimulus has reduced from $85 billion last year to $55 billion in March and with the Bank of England hinting that interest rates will rise sooner rather than later gilt yields increased 7 basis points to 3.21% before returning to where they started.

For March the yields range for the month was from 3.11% to 3.23% or 12 basis points, a low range compared to previous months. Fig 2 below shows the daily 15-year gilt yields and the increase or decrease from the previous day's close:

15-Year Gilt Yields - March 2014
Mon 3rd Tues 4th Wed 5th Thurs 6th Fri 7th
gilt yields down   0.06
gilt yields up   0.03
gilt yields up   0.03
gilt yields up   0.04
gilt yields up   0.01
Mon 10th Tues 11th Wed 12th Thurs 13th Fri 14th
gilt yields up   0.01
gilt yields down   0.01
gilt yields down   0.03
gilt yields down   0.05
gilt yields down   0.03
Mon 17th Tues 18th Wed 19th Thurs 20th Fri 21st
gilt yields up   0.01
gilt yields no change
gilt yields up   0.02
gilt yields up   0.07
gilt yields down   0.02
Mon 24th Tues 25th Wed 26th Thurs 27th Fri 28th
gilt yields down   0.05
gilt yields up   0.02
gilt yields down   0.01
gilt yields down   0.02
gilt yields up   0.04
Mon 31st        
gilt yields no change
  Fig 2: Daily 15-year gilt yields and changes

News related stories:
UK annuity rates unchanged by Fed tapering but interest rates will bite
Radical changes to pension annuities announced in Chancellor's Budget

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