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5 April 2013 last updated
Latest annuity rates may fall 4% as gilt yields collapse after US jobs data

The 15-year gilt yields have reduced 11 basis points to 2.17% with lower than expected US jobs data lowering equity markets and it very likely providers will reduce the latest annuity rates since reaching all time lows earlier this year.

Standard UK annuity rates could fall up to 4.4% even though increases were posed last month by Legal & General, Aviva and Canada life as gilt yields collapse.

Annuities are essentially based on the 15-year gilt yields which reached a high for the year of 2.76% in February and have reduced 59 basis points.

As a guide a 59 basis point fall would result in a 5.9% decrease in annuities although standard rates have not been increasing as fast as yields so far this year.

This means they are expected to fall 4.4% and smoker rates that have reduced already have a further 2.6% to fall and the least reduction is impaired annuity rates another 1.0%.

Latest annuity rates 4% fall possible
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UK annuities could return to all time lows

Gilt yields reached an all time low of 2.02% in August 2012
although retirement annuities continued to fall reaching a low in January due to the introduction of Unisex annuity rates by the EU Gender Directive.

If the providers reduce standard annuity rates by 4.4% if would force income levels to a new all time low. For example, a person aged 65 in good health with a fund of £100,000 could buy a single life, level pension annuity with an income of £5,569 pa and this could decrease by £245 pa to £5,323 pa at retirement. The Office of National Statistics (ONS) shows that a male aged 65 will live for 17.3 years and the £245 pa decrease means his lifetime income will be lower by £4,238 while females with a longer life expectancy of 22.1 years have £5,414 less over their lifetime.

Smoker annuities have already reduced by 0.84% last month so they would be expected to fall by a further 2.6%. Impaired annuity rates have closely matched the changes in gilt yields and have already reduced this month by 1.5% following reductions of 1.2% last month so can be expected to fall a further 1.0%.

US economy added fewer jobs concern for investors

The US economy added only 88,000 jobs last month after it was predicted to add 200,000. This increases concerns that there are weaknesses in the US economy and this is before the anticipated impact of any budget cuts to take effect. The Dow Jones reduced 41 points to 14,565 and the FTSE-100 index was 94 lower at 6,250.

Earlier in the week the US employment data was worse than expected resulting in a fall on Wall Street with the Dow Jones lower by 109 points at 14,553 and the FTSE-100 index lower by 70 points at 6,420.

Last month cuts of $85 billion were expected to be implemented as a result of the US fiscal cliff deal. It is estimated that growth in the US could be only 1.4% if the cuts were fully implemented although they may not be as great as feared as Federal departments have funding available from previous fiscal years which they can use first.

Even so the fall in gilt yields has been dramatic reducing 46 basis points in the last month alone. It is likely a result of the combined eurozone Cyprus bailout deal as well as a weakening US economy that has forced investors to move funds to safe havens such as US Treasury notes, UK government bonds and German Bunds. The worry for investors is that if the US economy does not continue to grow the impact will be declines in the world economy.

This means for people retiring and buying annuities the risks are now very high that annuity rates will decrease. In particular standard rates look vulnerable to a large decrease although providers may hold out for longer whereas impaired annuities will decrease quickly but by a smaller margin.

News related stories:
Pension annuities risk with gilt yields fall as Cyprus reject bailout deal
Buying annuities made safer as 15-year gilt yields recover
Enhanced annuities providers decrease rates by 1.2% as gilt yields fall
Annuity income lower as markets and gilts fall on Italy election deadlock
Best annuity income and markets fall 1.6% after US Fed stimulus fears
UK annuity rates rise 1.5% from Legal & General as gilt yields fall
Related internet links:
Guardian - US jobs report shows slowdown in hiring
BBC - US economy adds less jobs in March
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