Annuity rates fall after Eurozone fears

The 15-year gilt yields decreased by 35 basis points to 2.70% during the month sending annuity rates to a new low for the year. August is the first time since June 2013 that the year-on-year change is now downwards ending the strong recovery in rates seen during 2013.

The Eurozone is gripped in deflation fears after inflation falls to only 0.9% following a weaker European economy. Investors are moving funds to safe havens such as US Treasury notes and UK government bonds and gilts as there are further suggestions the European Central bank (ECB) may resort to Quantitative Easing.

Quantitative Easing involves printing money to increase liquidity in the market by buying long term government bonds and gilts which increases the price and decreases the yields.

Standard providers decreased their rates on average by 2.30% and we would expect so see further falls of 1.20% in the short term and in the medium term of 3 months annuity rates will decrease by 1.77%.

Smoker and enhanced annuity providers decreased their rates by 1.79% on average with a decrease of 1.71% possible in the short term and in the medium term of 3 months we can expect a decrease of 2.57%.

Equity markets started at 6,730 and increased by 90 points to end at 6,820. This represents a 1.3% rise and for people that remain invested will still see a fall in their annuity income as the fall in rates surpassed this figure.

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   0%   0%   100% Increases of: up to 0.0%   Decreases of: up to 3.7%

Fig 1: Annuity rate changes for the whole market

Fig 2: Change in standard rates last month compared to gilt yields

Fig 3: Change in enhanced rates last month compared to gilt yields

15-Year Gilt Yields - August 2014         Fri 1st         3.00%   0.05 Mon 4th Tues 5th Wed 6th Thurs 7th Fri 8th 2.98%   0.02 3.01%   0.03 2.95%   0.06 2.92%   0.03 2.88%   0.04 Mon 11th Tues 12th Wed 13th Thurs 14th Fri 15th 2.93%   0.05 2.93% 2.91%   0.02 2.89%   0.02 2.82%   0.07 Mon 18th Tues 19th Wed 20th Thurs 21st Fri 22nd 2.88%   0.06 2.85%   0.03 2.86%   0.01 2.85%   0.01 2.86%   0.01 Mon 25th Tues 26th Wed 27th Thurs 28th Fri 29th   2.80%   0.06 2.72%   0.08 2.71%   0.01 2.70%   0.01

Fig 2: Daily 15-year gilt yields and changes