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18 February 2015 last updated

UK annuities could rise as gilt yields make strong recovery

Annuities in the UK could rise as 15-year gilt yields recover 52 basis points to a high this year of 2.20% after reaching an all time low following the ECB starting their €1.1 trillion of stimulus and the fall in oil prices.

Pension annuity rates are based primarily on the 15-year gilt yields and an increase of 52 basis points would mean a rise in rates of about 5.2% from providers.

However, the rapid fall and recovery was faster than the providers could react so the expected improvement could be about 4.5% at some point in the future.

Gilt yields reached the all time low on 30 January and have made an impressive recovery. Providers of impaired annuities are likely to react first.

Just Retirement adjust they rates daily with the change in yields while others may take a week such as Partnership or Liverpool Victoria. Standard providers have a longer lead time and may do nothing until next month.

Uk annuities could rise next month
  Gilt yields are higher by 52 basis points suggesting UK annuities could increase next month
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Annuity rates to recover 4.5% in the short term

The announcement by the ECB that it was starting a €60 billion per month quantitative easing programme coupled with an unexpected fall in oil prices to under $50 a barrel is bringing Britain closer to deflation with inflation now at only 0.3%, the lowest level since records began. Yields on UK gilts remain higher than yields on European bonds offering a better return and attracting investors.

  Benchmark annuity rates and gilt yields
  Aug Sep Oct Nov Dec Jan Feb
Rate £5,987 £5,948 £5,906 £5,900 £5,755 £5,506 £5,494
Yield 2.70% 2.78% 2.64% 2.35% 2.15% 1.68% 2.20%

The above table shows 15-year gilt yields have recovered by 52 basis points in the last three weeks and annuity rates using our benchmark example are slightly lower than January at £5,494. This suggests annuities could recover next month by about 4.5%.

As an example this would mean our benchmark for a 65 year old with a fund of £100,000 buying a single life, level income currently at £5,494 pa could see this increase by £274 to £5,768 pa.

Alternatives to an annuity

As UK annuities remain near their all time lows and with the new pension changes applying from April 2015, it is possible to delay buying an annuity buy considering a flexible income plan.

A flexible drawdown plan offers the greatest flexibility offering an income from £Nil to maximum GAD which is about 50% more income than a standard annuity. In our benchmark example the income from an annuity is £5,494 pa and the drawdown is £8,250 pa. To reduce risk and volatility a protected fund can provide a smoothed return fund where the income is added daily.

For a very low risk option a fixed term annuity offers terms of one year or more with an income selected by you and a guaranteed maturity amount at the end of the term. The open market option remains available including an annuity from any provider, pension drawdown, taking the fund as cash or any other option available at that time.

News related stories:
Pension annuity rates to reduce as ECB starts €1.1 trillion stimulus
Annuities to fall with European Central Bank's stimulus plan
Impaired annuities lower by 2.2% as gilt yields tumble
Related internet links:
Guardian - Gilts hit historic low with fall in oil prices
BBC - UK inflation rate falls to 0.3% record low
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