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19 December 2012 last updated
Best annuity rates set for increase as 15-year gilt yields up 22 basis points

As the 15-year gilt yields continue the climb to 2.45% up 22 basis points this month it clears the way for a rise in the best annuity rates even with the changes with Unisex rates.

The 15-year gilt yields reached a low of 2.02% in August 2012 quickly followed by annuity rates falling to an all time low at that time.

Since then gilt yields have recovered and the expectation has been for annuity rates to improve with the yields, instead they have declined.

As a general rule a 22 basis point rise in gilt yields would result in a 2.2% increase in annuities for December and since August the 43 basis point rise would be a 4.3% increase.

The new Unisex rates have decreased both male and female annuities and this suggests that annuity rates are much lower than they should be with increases a possibility in the new year.

Gilt yields could increase annuity rates
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Annuities could increase 7% during 2013

Standard annuity rates have decreased 2.58% and smoker annuities 4.55% since August while gilt yields have increased 43 basis points which means there is scope for rates to increase. Standard rates could rise by 6.88% and smoker rates by 8.85% on this basis before gender neutral pricing is applied. As this will see increases for females only there will still be opportunities for annuities to rise.

The current low than expected annuity rates could be due to a combination of unique factors. The EU Gender Directive introducing Unisex rates has created volatility in the market as providers calculating the likely final levels for annuity rates. The difference between male and female rates has increased for some age groups with level pension annuities for those aged 70 as wide as 7.1% compared to 5% in the first quarter. For escalating rates for the same age they are 11.8% whereas during the first quarter the difference was only 6.5%.

Providers have been in a negative pricing cycle in anticipation of gender neutral pricing from 21 December 2012 and this has been exacerbated with a much higher demand for annuities from pensioners bringing forward their purchase to beat the deadline. As a result the leading providers such as Liverpool Victoria, Just Retirement, Partnership Assurance and Aviva have reduced their annuity rates to reduce the number of applications they are receiving due to the high volumes.

There are additional demand on provider resources from the Retail Distribution Review (RDR) to be introduced from January 2013 and as the year ends, providers also suffer from lower staff number with employees taking their holiday allowance which cannot be rolled over to next year further pressuring the administration system. These factors mean the best annuity rates seem unusually low and if gilt yields continue to improve could mean higher annuities during the first quarter of 2013 as providers revert to competitive strategies to meet new business targets.

News related stories:
Impaired annuity rates decreased 8% by providers to record lows
Highest annuity rates reduced 2% means lower pensioner income
Best annuity rates unlikely to increase despite gilt yields rise
Unisex annuity rates to reduce annuities for males and couples
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