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28 February 2014 last updated
Annuity rates recover 11.2% last year as gilt yields and equities bounce back

Last year experienced a bounce back in gilt yields with all annuity rates higher by 11.2% coupled with improving economies equity markets have helped to increase pension funds for those that remain invested further improving retirement income.

In January 2013 a deal between was negotiated over the US fiscal cliff preventing $600 billion of spending cuts and tax rises.

This avoided the US heading back into recession boosting market confidence with investors moving funds away from bonds and gilts into investments increasing yields and equity markets.

As annuity rates are mainly based on the 15-year gilt yields which were up 111 basis points. As a general rule this would result in annuities rising 11.1% and they actually increased by 11.2% during the year.

People that remained invested before taking their benefits they gained from the FTSE-100 index rising by 14.4% resulting in a significant improvement in income.

Enhanced annuity rates higher
  Both annuity rates and equities increased giving some people 30.6% more retirement income
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Standard annuities up to 15.6% higher

Annuities can have a range of features added such as joint life, guaranteed periods and escalation. The average increase in the standard rates last year was 10.1% and varied considerably with younger people benefiting the most with the biggest gains. The following chart shows ages from 55 to 75 with a £100,000 fund, no guaranteed period and single life basis.

Standard annuity 1 month changes
Fig 1: Change in standard annuity rates last year to Jan 2014

For standard annuities the largest gain was for those aged 55 with with rates up by 15.6%. The highest increases applied for level rates and those with guaranteed periods and the rates for joint life were loser at between 12% to 14%. For those selecting escalation the gains were less with the highest at 9.2% and the lowest 3.9% for a 50% joint life annuity with 3% escalation.

Enhanced annuities up to 22.6% higher

The average for the smoker and enhanced rates was better than standard annuities at 12.1%. The following chart shows enhanced rates for ages from 55 to 75 with a £100,000 fund, no guaranteed period and single life basis.

Standard annuity 1 month changes
Fig 2: Change in enhanced annuity rates last year to Jan 2014

For smoker and enhanced annuities the gains were higher with the maximum for those aged 55 selecting a 3% escalating rate on a single life basis where the was 22.6%. Again younger people benefited for the level rates with gains of 13% to 18% for those aged 55 to 65. The lowest gains were for people aged 75 on a single life basis with 3% escalation with gains of 6.1%.

People retiring with 30.6% more income

For those that remained invested during the year in a fund that tracked the FTSE-100 index would have benefited from a combined improvement in equities and annuity rates.

The FTSE-100 index increased 852 points or 14.4% from 5,897 to 6,749. As an example, a person aged 65 with a fund of £100,000 in December 2012 could have received an annuity of £5,425 pa on a single life and level basis. One year later their fund would have increased to £114,440 and the annuity rates increased by 14.2% which means the income would have improved by £1,665 pa to £7,090 pa.

In terms of lifetime income, the Office of National Statistics (ONS) would expect a male to live for 17.3 years and he will have £28,804 more over his lifetime. For a female she can expected to live for 20.4 years increasing her income by £33,966.

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  65 £5,098 £4,638  
  70 £6,055 £5,457  
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