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12 June 2014 last updated
Enhanced annuities lower as standard rates improve slightly
15-year gilt yields chart
Based on figures for May 2014
15-year gilt yields June 2014

The Bank of England is in no hurry to raise interest rates sending gilt yields 17 basis points lower during the month and followed quickly by enhanced annuity providers.

Standard rates:  
annuity rates up 0.40%
Enhanced rates:  
annuity rates down 0.63%
Gilt yields:  
annuity rates down 10 basis point

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Providers snub Budget changes with lower rates

The 15-year gilt yields were lower by 10 basis point and more volatile than previous months after comments from the Bank of England. As a general rule a 10 basis point rise would result in a 1.0% rise in annuity rates.

During the month Governor of the Bank of England Mark Carney stated that interest rates will be kept at the current rate of 0.5% for some considerable time. This resulted in a rapid 17 basis point fall in the 15-year gilt yields from 3.20% to 3.03%.

Standard providers increased their rates on average by 0.40% and we would expect so see a decrease of about 0.50% in the short term but in the medium term of 3 months annuity rates will decrease by 0.57%.

Smoker and enhanced annuity providers decreased their rates by 0.63% on average and an increase of 0.53% is possible in the short term but in the medium term of 3 months we can expect an increase of 2.59%.

Equity markets started at 6,780 and increased 64 points to end at 6,844. This represents a 0.94% rise and for people that remain invested have seen their fund values increase in value and for those buying annuities this has offset the lower enhanced annuity rates and can expect a slightly higher retirement income.

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   17%
annuity rates no change   45%
annuity rates decrease   38%
Increases of:
up to 4.3%

  Decreases of:
up to 1.3%
  Fig 1: Annuity rate changes for the whole market

For enhanced and smoker annuities there were no increases and the rates either remained unchanged or decreased during the month by as much as 1.34%.

Standard annuities remained unchanged with a few small decreases but some notable increases of up to 4.3% for single life, 3% escalating 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 increased and in particular for for escalating rates aged 75 with increases of up to 4.3% for single life but also those aged 55 to 60 with increase of between 1.4% to 1.9%.

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 reduced rates again this month across the board.

Impaired providers decreased their rates by 1.0% to 2.0% and changed their focus from one medical condition to others to change the balance of their book of business. See Annuity Rates Review For the latest updates.

Changes to the 15-year gilt yields

The impact on gilt yields was the announcement from the Governor of the Bank of England Mark Carney that there was no intention to increase interest rates.

The market had expected interest rates to increase possibly as soon as the end of this year and the news resulted in yields reducing by 17 basis points back to a low point for the year at 3.03%. There was a partial recovery towards the end of the month before moving south again.

For May the yields range for the month was from 3.03% to 3.20% or 17 basis points which is greater than last month. 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 - May 2014
      Thurs 1st Fri 2nd
gilt yields down   0.02
gilt yields down   0.01
Mon 5th Tues 6th Wed 7th Thurs 8th Fri 9th
gilt yields up   0.01
gilt yields no change
gilt yields down   0.01
gilt yields up   0.03
Mon 12th Tues 13th Wed 14th Thurs 15th Fri 16th
gilt yields up   0.04
gilt yields down   0.04
gilt yields down   0.07
gilt yields down   0.03
gilt yields up   0.04
Mon 19th Tues 20th Wed 21st Thurs 22nd Fri 23rd
gilt yields up   0.01
gilt yields up   0.03
gilt yields up   0.02
gilt yields up   0.01
gilt yields down   0.01
Mon 26th Tues 27th Wed 28th Thurs 29th Fri 30th
gilt yields no change
gilt yields down   0.07
gilt yields down   0.02
gilt yields up   0.02
  Fig 2: Daily 15-year gilt yields and changes

News related stories:
Enhanced annuities fall as Bank of England resist interest rate rise
Radical changes to pension annuities announced in Chancellor's Budget

Annuity Rates
  Age Single Joint  
  55 £3,947 £3,702  
  60 £4,391 £4,052  
  65 £5,098 £4,638  
  70 £6,055 £5,457  
£100,000 purchase, level rates, standard
Unisex rates and joint life basis
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