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20 November 2012 last updated |
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Best annuity rates unlikely to increase despite gilt yields rise |
The 15-year gilt yields have increased 13 basis points in the last few days giving providers the chance to increase the best annuity rates on the market but this is unlikely with Unisex rate changes.
Providers have been reducing annuity rates this month and the recant increase in the 15-year gilt yields are unlikely to change the direction. Yields have increased to 2.31% and this gives providers more scope to improve annuity income for pensioners.
Since April this year UK annuities have been reducing and more rapidly as the UK Gender Directive date of 21 December approaches which will mean male and female rates will be the same.
Gilt yields have increased since they reach a low of 2.02% in August to 2.32% today and as a general rule a 30 basis point rise would mean a 3% rise in annuity rates. Annuities are actually lower by about 3% which suggests providers are in a downward pricing cycle.
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Gender Directive already discounted in annuity rates
During normal pricing periods competition would mean pensioners would receive the best possible offers from providers and annuity rates would closely follow the 15-year gilt yields. With the EU Gender Directive both male and female annuities must be the same and this has resulted in volatility in the market.
As providers do not know exactly where rates will be for the different ages, features of pension annuities for different fund values offered by competitors the general strategy is to take account of this unknown risk by reducing annuity rates now to create more margin for the underwriters. This potential over correction will allow providers to refine their offers and target the more profitable markets based on newly calculated figures for a combined unsex annuity rate formula.
In the short term pensioners retiring now will receive poor value from their UK annuities as some of the EU Gender Directive is already being factored before the introduction of unisex annuity rates. For example, the annuity rates when compared to gilt yields over the past six months will usually show some time periods where annuities are over priced and some under priced due to competition.
This changed from September and now the best annuity rates are under priced with the expectation of increases possible of 2-3% over one month, 6% over three months and 8-9% over 5 months. If gilt yields remain at current levels if is possible that annuity rates will increase in the first quarter of 2013.
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Age |
Single |
Joint |
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55 |
£6,361 |
£5,898 |
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60 |
£6,842 |
£6,244 |
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65 |
£7,474 |
£6,843 |
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70 |
£8,405 |
£7,660 |
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£100,000 purchase, level rates, standard
Unisex rates and joint life basis |
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