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27 August 2013 last updated
Latest annuity rates improve 1.5% but Syria action could reverse gains

Leading provider Legal & General and Aviva have improved their latest annuity rates by 1.5% after 15-year gilt yields reach a new high for the year which could be reversed as Syria action is making investors nervous.

The 15-year gilt yields have increased by 60 basis points since the Ben Bernanke of the US Federal Reserve announced they were planning to end the stimulus package of $85 billion per month.

This month yields are up 36 basis points and as annuity rates are mainly based on gilt yields we would expect a 3.6% rise over time. The recent threat of military action in Syria has seen investors move funds to safe havens with falls in equity markets and gilt yields which could threaten recent gains.

In the medium term of three months we would expect at least further increase from standard annuities, however, in the short term the recent 1.5% rise is a cautious move as uncertainty remains about the US stimulus and Syria may now sent rates lower.

Latest annuity rates improve 1.5%
  Annuity providers edge rates higher with higher yields although Syria action could deflate gains
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IMF warns central banks not to end stimulus

The International Monetary Fund (IMF) has warned central banks not to bring an end to stimulus packages too soon as these are still needed in the Eurozone and Japan.

Measures by the US Federal Reserve to taper their stimulus package shocked equity markets and sent bond and gilt prices lower. For people retiring in the UK this means a rise in the latest annuity rates as the 15-year gilt yields increased 60 basis points.

Head of the IMF Christine Lagarde has said that stimulus measures have allowed countries more time to return to growth and and stopping this could result in greater market volatility.

The Bank of England may have to consider Quantitative Easing (QE) after the new "forward guidance" policy is not been followed by the market pushing gilt yields higher. This may take a few months and if the Monetary Policy Committee (MPC) decide it is necessary it is likely they will start with £25 billion to QE taking the programme to £400 billion.

Annuity rates rise but Syria action is new threat

The latest improvement from providers of 1.5% will increase income in retirement for people. As an example, our benchmark for a person aged 65 with a £100,000 fund has seen their annuity income improve on a single life, level basis by £80 pa from £5,944 pa to £6,024 pa.

This is the first time the annuity income for our benchmark has been over £6,000 pa since May 2012. The improvement of £80 pa is small over one year, however over a persons lifetime the Office of National Statistics (ONS) would expect a male to live for 17.3 years and he will receive an extra £1,384. For a female she can expected to live for 20.4 years increasing their income by £1,632 this month alone.

The immediate threat to rates is the threat of action in Syria which has seen gilt yields fall by 9 basis points today. The yields on the 15-year gilts has reduced from 3.23% to 3.14% as investors move funds to safe havens such as US Treasury notes and UK government bonds and gilts. a 9 basis point fall would mean annuity rates reducing by 0.9% at some point in the future which would reverse the recent gains.

Falls in yields are likely to continue if military action is more likely so there may be a halt in any improvements in annuity rates and possibly a fall in enhanced annuities which are more sensitive to yield movements than standard rates.

News related stories:
Enhanced annuity rates 2% higher as gilt yields reach new levels
UK annuities boost as Fed plan to taper QE to start from September
Best annuity rates up 2% from leading providers with more competition
Related internet links:
BBC - IMF Lagarde urges caution over withdrawing stimulus
BBC - Markets hit by Syria fears spark share sell-off
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