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5 November 2013 last updated
Annuity rates increase up to 2.8% from Legal & General

Leading provider Legal & General has increase their annuity rates by up to 2.8% as gilt yields begin to rise after uncertainty over the US debt ceiling deal and tapering of stimulus had reversed gains.

Annuity rates are based on the 15-year gilt yields which reached a recent low of 2.97% after the Federal Reserve delayed the tapering of the $85 billion per month stimulus package.

The US debt ceiling deal allowing an extension to borrowing is only until January 2014 and means more volatility in the short term.

Gilt yields have increased by 17 basis points since 30 October and as a general rule this would result in annuities increasing by 1.7%.

Legal & General had decreased their rates by 2.3% last month, however, better than expected economic data from the UK and US has improved the prospects of rising yields.

Providers had experienced a poor start to this year after large sales in the fourth quarter of last year before the EU Gender Directive lowered annuity rates in general.

Annuity rates up from Legal & General
  Legal & General increases their annuity rates with better economic sending gilt yields higher
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Rates now 14.1% higher this year

Annuity rates have increased strongly and are 14.1% higher than the start of the year. Even since May our benchmark example, rates are 8.1% higher since May as shown in the table below.

  Benchmark annuity rates and gilt yields
  May Jun Jul Aug Sep Oct Nov
Rate £5,671 £5,815 £5,944 £6,024 £6,159 £6,009 £6,132
Yield 2.57% 2.99% 2.93% 3.16% 3.09% 3.04% 3.14%

For example, our benchmark is for a person aged 65 with a fund of £100,000 buying a single life, level annuity of £5,373 pa in January 2013. Now the same fund could by an income that is £759 pa higher at £6,132 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 £13,130 more over his lifetime. For a female she can expected to live for 20.4 years increasing her income by £15,483.

Improving economy could see rates increase

The UK is benefiting from an improving economy with manufacturing improving as the Purchasing Managers' Index (PMI) at 56.0 in October compared to 56.3 in September. A figure of more than 50 indicates expansion and below indicates contraction. The service sector has even better figures with 62.5 in October compared to 60.3 in September.

The UK is expected to be the fastest growing Western economy in the fourth quarter with growth of 1.3%. This could mean that unemployment currently at 7.7% may fall faster than expected and could trigger the Bank of England's target of 7% when they will start to increase interest rates. According to the National Institute of Economic and Social Research (NIESR) this could occur earlier than expected in 2015 and not 2016.

The 15-year gilt yields increased by 8 basis points today to reach 3.14% and the building evidence of improving economic data to counter the recent concern with the Federal Reserve stimulus and US debt ceiling issues. Recent manufacturing data surprised markets with a PMI of 56.4 in October up from 56.2 when a figure of 55 or less was expected.

For people retiring and taking their benefits any further positive economic data from the US and UK will help to push gilt yields higher in November and providers will have more room for increasing annuity rates towards the end of the month. This would be a good opportunity to lock in these higher rates before the end of the year as next year the review of the US debt ceiling could see pension annuity rates experience volatility.

News related stories:
Pension annuities to recover as US debt ceiling deal is agreed
Best annuity rates from Legal & General reduce 2.3% as gilt yields fall
Annuity Rates stabilise as US Fed delays tapering stimulus
Annuities boost as market defies Bank of England rate freeze
Related internet links:
Telegraph - UK manufacturing sector boost
BBC - UK interest rates could rise in 2015
BBC - UK fastest growing Western economy
Annuity Rates
  Age Single Joint  
  55 £3,723 £3,370  
  60 £4,192 £3,911  
  65 £4,920 £4,378  
  70 £5,769 £5,246  
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