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6 January 2014 last updated
Annuity rates fall even though gilt yields rise on Fed tapering plan
15-year gilt yields chart
Based on figures for December 2013
15-year gilt yields December 2013

The Federal Reserve is to begin tapering resulting in a rise in the 15-year gilt yields during the month by 21 basis points.

Despite this annuity rates reduced showing there is apathy among providers at the end of the year.

Standard rates:  
annuity rates down 0.47%
Enhanced rates:  
annuity rates down 0.06%
Gilt yields:  
annuity rates up 21 basis points

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Annuities rates disappoint even as gilt yields improve

As the US Federal Reserve begins to taper the Stimulus package by $10 billion down to $75 billion the 15-year gilt yields ended the month 21 basis points higher at 3.42% and as a rough guide a 21 basis point rise would see annuity rates increase by 2.1%.

Standard providers actually decreased their rates by 0.47% and we would expect so see a further improvement of about 2.57% with enhanced and smoker annuity providers also decreasing their rates by 0.06% on average and a further 1.16% is possible.

Over the past two months yields have improved by 38 basis points representing a significant improvement in yields which has yet to be fully reflected by the annuity providers.

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   14%
annuity rates no change   17%
annuity rates decrease   69%
Increases of:
0.1% - 0.6%

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

Surprisingly 69% of annuity rates decreased last month by up to 2.0% compared to small increases by only 14% of rates. The increases were also small with the maximum being only 0.6%.

The largest decreases were standard annuities for single life, escalating annuities for people aged 70 to 75.

Equity markets started at 6,651 and increased 98 points to end at 6,749. This represents a 1.47% rise and for people that remain invested have seen their fund increase in value which would counter the fall in pension annuity rates.

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 decreased even though the 15-year gilt yields improved and only annuities for 100% joint life increased fractionally.

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 annuity rates there were small decreases of no more than 1.0% with decreases for those aged70 on a single life basis.

Impaired providers have reduced their rates even though the data for gilt yields were positive and it would appear competition for business was low at the end of the year. See Annuity Rates Review For the latest updates.

Changes to the 15-year gilt yields

The Federal Reserve have finally taken action to reduce the $85 billion a month stimulus package by $10 billion to $75 billion after a series of positive US economic data sending prices for bonds lower and yields higher.

For November the yields range for the month was from 3.21% to 3.47% or 26 basis points which is a greater range than the previous months with standard as well as smoker and enhanced annuities lagging behind yields. 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 - December 2013
Mon 2nd Tues 3rd Wed 4th Thurs 5th Fri 6th
gilt yields up   0.07
gilt yields down   0.03
gilt yields up   0.07
gilt yields up   0.02
gilt yields down   0.03
Mon 9th Tues 10th Wed 11th Thurs 12th Fri 13th
gilt yields up   0.02
gilt yields down   0.01
gilt yields down   0.01
gilt yields up   0.02
gilt yields no change
Mon 16th Tues 17th Wed 18th Thurs 19th Fri 20th
gilt yields down   0.01
gilt yields down   0.01
gilt yields up   0.04
gilt yields up   0.04
gilt yields down   0.02
Mon 23rd Tues 24th Wed 25th Thurs 26th Fri 27th
gilt yields up   0.02
gilt yields up   0.02
gilt yields no change
gilt yields up   0.08
Mon 30th Tues 31st      
gilt yields down   0.04
gilt yields down   0.01
  Fig 2: Daily 15-year gilt yields and changes

News related stories:
Best annuities to benefit if US Federal Reserve tapers stimulus
UK annuities could rise as market expects Fed to taper stimulus

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  Age Single Joint  
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  60 £4,695 £4,418  
  65 £5,361 £4,913  
  70 £6,172 £5,708  
£100,000 purchase, level rates, standard
Unisex rates and joint life basis
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