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1 September 2014 last updated
Annuity rates fall after Eurozone deflation threat sends gilt yields lower
15-year gilt yields chart
Based on figures for August 2014
15-year gilt yields August 2014

Annuity rates fall 2.3% on average after significantly lower 15-year gilt yields reducing by 35 basis points to a low of 2.70% as investors seek safe havens following worsening conflicts in the Middle East and Eurozone deflation threats.

Standard rates:  
annuity rates down 2.30%
Enhanced rates:  
annuity rates down 1.78%
Gilt yields:  
annuity rates down 35 basis point

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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
annuity rates increase   0%
annuity rates no change   0%
annuity rates decrease   100%
Increases of:
up to 0.0%

  Decreases of:
up to 3.7%
  Fig 1: Annuity rate changes for the whole market

This month 100% of annuities for both standard and as well as enhanced and smoker rates reduced. Significant decreases were experienced for all annuitants and in particular those in good health aged 70 for single and joint life 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 have been decreased aggressively across the board for all ages and very similar for all types of annuities.

What happened to enhanced rates

Lifestyle smoker and enhanced annuities have decreased significantly across the board for all types of annuities and ages.

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

For enhanced and smoker rates the largest fall was 3.1% for those aged 55 and 60 where the annuity includes 3% escalation. Impaired providers decreased their rates by up to 2.0% although some medical conditions have not been changed yet. See Annuity Rates Review For the latest updates.

Changes to the 15-year gilt yields

The yields change for the month was from 3.05% to 2.70% or 35 basis points which is significantly 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 - August 2014
        Fri 1st
gilt yields down   0.05
Mon 4th Tues 5th Wed 6th Thurs 7th Fri 8th
gilt yields down   0.02
gilt yields up   0.03
gilt yields down   0.06
gilt yields down   0.03
gilt yields down   0.04
Mon 11th Tues 12th Wed 13th Thurs 14th Fri 15th
gilt yields up   0.05
gilt yields no change
gilt yields down   0.02
gilt yields down   0.02
gilt yields down   0.07
Mon 18th Tues 19th Wed 20th Thurs 21st Fri 22nd
gilt yields up   0.06
gilt yields down   0.03
gilt yields up   0.01
gilt yields down   0.01
gilt yields up   0.01
Mon 25th Tues 26th Wed 27th Thurs 28th Fri 29th
gilt yields down   0.06
gilt yields down   0.08
gilt yields down   0.01
gilt yields down   0.01
  Fig 2: Daily 15-year gilt yields and changes

News related stories:
Annuity rates fall 2.3% as yields lower on Eurozone deflation crisis
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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