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18 March 2013 last updated
Best annuity rates higher by 1.0% from Legal & General

Legal & General has increased their best annuity rates by up to 1.0% as gilt yields reduce with the crisis in Cyprus undermining investor confidence which means people retiring should take advantage of higher incomes while they can.

Annuity rates are based primarily on the 15-year gilt yields that reached a high for the year of 2.76% last month. At this level standard annuities were low by comparison but remained essentially unchanged compared to impaired annuity rates.

Now as yields have reduced to 2.48% standard rates are moving higher although this may not be sustainable if yields continue to reduce.

The Cyprus crisis has created investor fear that the eurozone may not be able to support member states requiring a bailout and a tax on the bank accounts in Cyprus may set a precedence for other eurozone member states in need of a bailout.

Best annuity rates higher from Legal & General
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Annuities under threat from falling gilt yields

Gilt yields are lower by 16 basis points in the last week and 28 basis points in the last month. As a general rule a 28 basis point fall in rates would result in a 2.8% fall in annuity rates. Impaired annuity rates have decreased earlier in the month after a strong increase last month, However, standard annuities have been slow to rise this year so can actually afford a small improvement.

If the 15-year gilt yields continues to fall the pressure on annuities will be too great and they will also reduce. A 16 basis point fall in yields would mean annuity rates reducing at some point by 1.6% and as an example, a person with £100,000 could purchase a single life, level annuity for £5,485 pa. If the providers follow the recent fall in yields this would mean an £87 pa decrease to £5,398 pa very near to the lowest levels experienced for annuities.

Cyprus crisis undermining future annuity income

The Cyprus deal involves the a 10 billion bailout and the eurozone has also required Cyprus to find 5.8 billion from other sources resulting in a 6.75% tax charge on bank savings up to 100,000 euros and 9.9% above this amount and this could have an indirect impact on the best annuity rates.

This was a requested by Germany and is extremely unpopular with bank holders with protests on the streets against the measures as well as closing the banks to prevent access. The risk here is that under EU regulation the first 100,000 euros of savings is protected from a bank collapse and this case suggests that savings are not protected.

The possible precedence that could apply to other countries such as Spain and Italy are undermining investor confidence in the European Central Bank (ECB) pledge to do "whatever it takes" to protect and bailout member states. This means institutional investors moving their funds to safe havens such as UK government bonds and gilts thereby increasing the price and decreasing the yields. If this continues eventually providers will be forced to reduce pension annuity rates.

News related stories:
Enhanced annuities providers decrease rates by 1.2% as gilt yields fall
Enhanced annuity provider Liverpool Victoria with 2.6% higher rates
Impaired annuity rates higher by 1.6% from Partnership
UK annuity rates rise 1.5% from Legal & General as gilt yields fall
Enhanced annuities increase by 1.4% with more competition
Related internet links:
Guardian - Cyprus bailout fury as banks close
Telegraph - Investors slam crazy bailout
BBC - Eurozone ministers urge Cyprus to shield small savers
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