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28 November 2014 last updated

Impaired annuity rates lower by 2.2% as gilt yields tumble

Providers of impaired annuities have reduced their rates by up to 2.2% following a dramatic 31 basis point fall in gilt yields as economic data shows the UK and Eurozone are slowing down with the ECB considering a stimulus programme to avoid deflation in Europe.

Annuity rates are mainly based on the 15-year gilt yields, currently at 2.35% down from 2.66%, and the dramatic fall this month has prompted impaired annuity providers to reduce their rates.

Just Retirement has seen rates lower by up to 2.1%, MGM Advantage by 2.2% with Partnership and Liverpool Victoria by 1.0%. The impaired providers adjust they rates on a daily basis whereas the standard annuity providers often delay changes for several weeks.

The combination of poor economic data and UK interest rates on hold until the end of 2015 or start of 2016 has forced yields to the lowest level this year. The last time yields were this low was May 2013 before the Federal Reserve planned to stop their stimulus.

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Standard annuities also likely to fall

So far standard annuities have not reacted significantly to changes in the yields and are lower by only 0.69%. This would suggest that they could fall by a further 2.99% before the end of the year.

  Benchmark annuity rates and gilt yields
  May Jun Jul Aug Sep Oct Nov
Rate £6,078 £6,143 £6,135 £5,987 £5,948 £5,906 £5,900
Yield 3.06% 3.14% 3.05% 2.70% 2.78% 2.64% 2.35%

The above table shows that our benchmark example has virtually not changed yet yields are lower by 31 basis points. This suggests a fall of 3.1% in annuity rates is likely.

Our benchmark example for a person aged 65 with a fund of £100,000 could purchased a single life, level annuity with an income of £5,900 pa now. By reflecting the reduction in yields this figure will reduce by £177 pa to £5,723 pa.

In terms of lifetime income, the Office of National Statistics (ONS) would expect a male to live for 17.3 years and he will have £3,062 less over his lifetime. For a female she can expected to live for 20.4 years decreasing her lifetime income by £3,610.

Gilt yields could fall further

There remains the risk that yields will continue to fall as the European Central Bank (ECB) considers a €1 trillion stimulus programme to keep the Eurozone out of deflation.

This is expected to send the yields on German 10-year Bunds lower than the ultra low Japanese 10-year bond yields, currently only 0.45%. The demand for sovereign bonds from the ECB will send the price of all bond assets higher and the yields lower during 2015.

In the UK investor activity in buying government bonds and gilts is occurring in anticipation of the ECB quantitative easing programme and it is likely to send annuity rates lower.

People buying annuities may have to wait a number of years or consider an alternative such as a fixed term annuity for three years or more allowing time for the ECB stimulus to end and rates to rise or pension drawdown using a protected growth fund to reduce volatility.

News related stories:
Annuity rates fall 2.3% as yields lower on Eurozone deflation crisis
Enhanced annuities fall as Ukraine crisis sends yields to new low
Enhanced annuities lower as Bank of England resist interest rate rise
Related internet links:
Telegraph - German bond yields to fall as ECB battles deflation
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