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7 February 2014 last updated
Standard annuities lower as gilt yields fall 26 basis points
15-year gilt yields chart
Based on figures for January 2014
15-year gilt yields January 2014

Standard annuities are lower by up to 2% after the 15-year gilt yields fall 26 basis points.

Developing countries have experienced liquidity problems since the US Fed started tapering the $85bn stimulus sending investor funds to safe havens such as bonds and gilts.

Standard rates:  
annuity rates down 1.17%
Enhanced rates:  
annuity rates up 1.15%
Gilt yields:  
annuity rates down 26 basis points

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Mixed annuities rates react to market volatility

The 15-year gilt yields have reduced by 26 basis points after poor jobs data from the US suggested economic growth was slowing. Measures to further reduce the US stimulus package have impacted on markets in developing countries.

The stimulus measures have resulted in large amounts of funds being invested in these markets and the tapering is causing liquidity shortages sending currencies lower. Investors are now moving their funds out of these markets to safe havens such as US Treasury notes and UK government gilts.

Even though less stimulus would result in a lower price and higher yields, it current has the opposite effect with investor fear of developing market crisis driving prices up and yields down.

Standard providers decreased their rates by 1.17% and we would expect so see a further decrease of about 1.43% in the short term but in the medium term of 3 months they can increase by 1.39%.

Although smoker and enhanced annuity providers increased their rates by 1.15% on average and a decrease of 3.75% is possible in the short term but in the medium term of 3 months the decrease is less at 0.43%.

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   48%
annuity rates no change   1%
annuity rates decrease   51%
Increases of:
0.3% - 3.2%

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

Enhanced and smoker annuities represented 90% of the increases in rates as providers become more competitive and ignore the fall in gilt yields after a sluggish start to the year.

Standard annuities represented 86% of lower annuity rates in particular after falls from Legal & General and Canada Life.

Equity markets started at 6,749 and decrease 239 points to end at 6,510. This represents a 3.54% fall and for people that remain invested have seen their fund decrease in value which has been made worse with a 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 by half of the fall from gilt yields although this is offset by annuities falling the previous month while yields increased.

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 has been increases while yields decrease although this is offset by annuities falling the previous month while yields increased.

Impaired providers have started to increase their rates after a period where they reduced rates. See Annuity Rates Review For the latest updates.

Changes to the 15-year gilt yields

Concern over tapering the US stimulus package has resulted in liquidity shortages in developing countries and panicked investors taking their profits by seeking safe havens in the US, Europe and UK buying bonds and gilts.

This has had the effect of reducing yields when an increase would have resulted with lower gilt prices and higher yields.

For November the yields range for the month was from 3.16% to 3.43% or 27 basis points which is a similar range to the 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 - January 2014
    Wed 1st Thurs 2nd Fri 3rd
gilt yields up   0.01
gilt yields down   0.01
Mon 6th Tues 7th Wed 8th Thurs 9th Fri 10th
gilt yields down   0.04
gilt yields down   0.02
gilt yields up   0.03
gilt yields no change
gilt yields down   0.08
Mon 13th Tues 14th Wed 15th Thurs 16th Fri 17th
gilt yields down   0.05
gilt yields no change
gilt yields up   0.03
gilt yields down   0.04
gilt yields up   0.02
Mon 20th Tues 21st Wed 22nd Thurs 23rd Fri 24th
gilt yields down   0.01
gilt yields no change
gilt yields up   0.03
gilt yields down   0.06
gilt yields down   0.03
Mon 27th Tues 28th Wed 29th Thurs 30th Fri 31st
gilt yields up   0.02
gilt yields up   0.03
gilt yields down   0.04
gilt yields down   0.02
gilt yields down   0.03
  Fig 2: Daily 15-year gilt yields and changes

News related stories:
UK annuity income is 2.4% lower as FTSE-100 index falls
Annuity rates 2% lower from Legal & General surprises market
Best annuities threat as gilt yields fall after poor US jobs data

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