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31 May 2013 last updated
Annuity Rates - May 2013

Strong surge in gilt yields helps annuity rates higher after better than expected US jobs data and UK service sector figures with further rates increases likely.

Standard rates:  
annuity rates up 0.44%
Enhanced rates:  
annuity rates up 1.54%

With the recovery in the 15-year gilt yields annuity rates have increased with standard rates higher by 0.54% and lifestyle enhanced and smoker rates 1.54% higher suggesting there is more improvements to be made in the short term.

In the medium term of six months annuities have less scope to rise and providers of impaired annuities in particular are likely to make incremental changes to reflect day to day variations. For standard rates escalating and joint life offer the best scope to rise by 3% to 4.5% in the short and medium term.

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Annuity rates will decreased by providers

15-year gilt yields increased 35 basis points which means we would expect to see annuity rates rise by 3.5%. Find out more about the change in gilt yields:

Gilt yields surge 35 basis points on strong economic data

In the short term we would expect standard rates to increase 3.06% on average with lifestyle enhanced and smoker annuities increasing by 1.96% on average.

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   80%
annuity rates no change   9%
annuity rates decrease   11%
Increases of:
0.1% - 4.3%

  Decreases of:
0.4% - 2.6%
  Fig 1: Annuity rate changes for the whole market

The above table shows that 80% of annuities increased although the improvements were small for standard rates of between 0.5% and 1.4% whereas enhanced and smoker were from 0.1% to 4.3%. The impaired annuity providers are more aggressive at changing rates and we would expect them to react quickly to any changes in yields.

Only 11% of rates decreased for smokers aged 65 and for those in good health aged 75 with 9% remaining unchanged. The decreases were in a range from 0.4% to 2.6%.

Equity markets reached a high with the FTSE-100 index at 6,840 after starting at 6,430 but eventually ended the month 6,583 up 153 points. This is a 2.3% increase in the pension fund value for people that remain invested before they buy their annuity increasing their income in retirement.

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

Over the month standard annuities have not fully reflected the rise in gilt yields and this suggests that increases are possible. The following chart shows the six month changes.

Standard annuity 6 month changes
Fig 3: Change in standard rates last 6 months compared to gilt yields

Over the last six months there a differences between single and joint life pension annuity rates with single life level rates matching yields whereas single life escalating and all joint life are below. In particular 50% joint life could increase by 4.5% over the longer term.

What happened to enhanced rates

Lifestyle enhanced and smoker annuities also increased and providers were more aggressive at raising rates although there still remains room for improvements over the shorter term as can be seen in the following chart.

Enhanced annuity 1 month changes
Fig 4: Change in enhanced rates last month compared to gilt yields

In the medium term of 6 months enhanced annuity rates are higher than expected suggesting that providers may be cautious about raising rates too much.

Enhanced annuity 6 month changes
Fig 5: Change in enhanced rates last 6 months compared to gilt yields

The reluctance of providers to increase rates is due to the longer term picture and the fact that gilt yields are volatile and could easily decrease back towards their all time low level which they did do in May. For the latest updates see Annuity Rates Review.

News related stories:
Gilt yields 2013 surge 35 basis points on strong economic data
Annuity rates to increase 2% as gilt yields rebound on US jobs data
Annuities income boost as FTSE index and service sector improve

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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