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13 August 2013 last updated
Enhanced annuity rates 2% higher as gilt yields reach new levels
Providers of enhanced annuity rates have made increases of 2% with further rises likely after the 15-year gilt yields rise 24 basis points this month after the US Fed is expected to taper stimulus from September.

Annuity rates are based mainly on the 15-year gilt yields which have increased significantly in August to reach 3.17% last attained in September 2011.

As a general rule a 24 basis point increase in yields will result in a 2.4% rise in annuities although providers may wait to see if the momentum continues.

If the US Federal Reserve does start tapering it could result in a sudden fall in the price of bonds and gilts and a rise in yields. The Fed currently invests $85 billion per month in buying US Treasuries and mortgage-backed securities helping to create a price bubble in the market.

The trend of rising yields is bad news for governments as it pushes up the cost of their borrowing but good news for UK people retiring as income from annuities will also rise.
Enhanced annuity rates 2% higher
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Enhanced annuities rebound strongly

In May this year gilt yields reached a low point of 2.15% and are 102 basis points up in three months suggesting annuity rates should be up by 10.2%. Enhanced annuities are on average 7.6% higher and standard annuities less on average 5.6% so improvements can be expected if yields remain at this level.

For a person aged 65 retiring with a fund of £100,000 suffering from high blood pressure, Cholesterol and diabetes they could have received an income based on a single life, level basis of £6,774 pa at the end of April rising £438 pa or 6.4% to £7,212 pa by the end of July. For standard annuities on the same basis the income was £5,625 pa rising £319 pa or 5.6% to £5,944 pa.

Impaired annuity rates offer enhancements over standard rates if people suffer from medical conditions as their life expectancy is slightly reduced. For conditions such as smoking, being overweight, a heavy drinker, suffering from high blood pressure and Cholesterol increases of 18% could be expected. For more serious conditions such as diabetes, heart condition or cancers enhancements of up to 40% are possible.

Gilt yields could rise further

With better economic data from the US, UK markets and news that the Eurozone is about to exit their 18-month double-dip recession markets are expecting the end of Quantitative easing sending bond and gilt yields higher.

It is likely that this will intensify towards the end of August with higher yields while the markets speculate as to whether the US Federal Reserve will implement the tapering of QE.

Enhanced annuity providers will increase their rates quickly, within a week of rises in yields whereas standard providers are likely to wait until September before making any significant improvements.

This would mean people buying annuities would benefit from the higher yields with improved annuity income. The risk here is that most people remain invested until they purchase their annuity and equity markets reduced suddenly when the tapering plan was first announced. This means that as yields increase invested pension funds could decrease off-setting the benefits from higher yields.

News related stories:
Impaired annuity rates down 1.3% from provider Liverpool Victoria
Retirement annuities threat as yields fall on UK and US stimulus plans
Enhanced annuities up 7.8% and now at risk of falls in medium term
Annuity income and equities reduce as Fed plans to stop stimulus
Related internet links:
Guardian - Eurozone set to exit double-dip recession
Telegraph - Fed should taper QE in September
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