Gilt yields have soared to 3.08% with enhanced annuities rising to new levels this month to the benefit of people retiring but now look too high in the medium term and could mean a correction if yields fall.

Annuity rates closely follow the 15-year gilt yields and as a rough guide a 10 basis point rise in yields would result in a 1.0% rise in annuities.

In June yields are up 42 basis points following a 35 basis point rise last month and some enhanced annuities are higher by 7.8% this month. On average rates are higher by 5.11% exceeding the rise in yields which suggests enhanced and smoker annuities will reduce by 0.91% in the short term.

The reason for the rise in yields is due to the US Federal Reserve statement that they were going to reduce their $85 billion a month stimulus package and stop this completely by July 2014. This was driving the price of bonds and gilts higher and without the stimulus prices would fall and yields increase so investors have taken action now in anticipation of the future changes.