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4 January 2013 last updated
UK annuity rates could increase as 15-year gilt yields reach a new high

The 15-year gilt yields have increased by 30 basis points to 2.61% in the last few days giving hope that annuity rates could also increase after significant decreases in the fourth quarter of last year.

UK annuity rates have decreased over the last month for males while female rates increased due to the EU Gender Directive and the introduction of Unisex rates.

This month has seen gilt yields increase considerably and as annuity rates are primarily based on yields as a general rule a 30 basis point rise would translate to a 3.0% increase in annuity rates.

In particular the rise in yields were due to the US fiscal cliff deal that gave a boost to equity markets and investor confidence. As a result investors moved funds away from safe havens such as UK government gilts to higher yielding bonds lowering the price of the 15-year gilt yields although annuity providers remain content with holding annuity rates at artificially low levels.

Gilt yields may improve annuity rates
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Annuity rates could see 3.4% increase

At the end of December standard annuity rates
for males decreased on average by 2.77%, female rates increased by 3.95% and joint rates decreased slightly by 0.11%. The gender neutral pricing means that overall standard rates increased by 0.32% compared to 15-year gilt yields that increased by 8 basis points suggesting that there was room for a slight improvement in annuities. For smokers the figures are males decreased by 2.49%, female rates up 2.21% and joint annuities down 0.17%.

With the improvements in gilt yields in January UK annuities could increase by 3.4% if providers in the short term and when making the comparison over the longer term such as six months annuities are even further behind yields suggesting increases of up to 10%.

Providers reducing rates while gilt yields increase

There may be a number of reasons why gilt yields are rising all related to market confidence. Firstly relief from investors that the US has avoided the fiscal cliff, secondly Europe's rescue fund to protect sovereign defaults and thirdly the Bank of England has stopped Quantitative Easing purchasing UK government gilts which drives prices up and yields down. Investors therefore feel confident to move their funds away from low yielding safe havens such as UK gilts and US Treasury notes to higher risk investments.

Providers have been in a downward pricing cycle since gilt yields reached a low of 2.02% in August 2011 and have reduced annuity income for pensioners in the past four months. Since this low the gilt yields have increased by 59 basis points suggesting pension annuity income could rise by 5.9% when actually they have reduced by 4.9% over this period.

The last decrease was from impaired annuity provider Partnership Assurance decreasing rates by 2.4% on 27 December. The EU Gender Directive may have increased demand for UK annuities significantly last month to allow providers to time to consider seeking new business so they may wait before increasing rates due to competition.

Pensioners retiring now are actually being offered artificially lower annuity rates and if gilt yields remain at current levels or increase eventually providers will return to normal market conditions and start competing for new business.

News related stories:
Impaired annuity rates up 3% as providers race to match rising market
Impaired annuities up 3.5% for second time by Just Retirement
Impaired annuity rates increase by 2.5% from Just Retirement
Best annuity rates increase as 15-year gilt yields up 22 basis points
Impaired annuity rates have been reduced up to 2% as gilt yields fall
Related internet links:
Guardian - Why are gilt yields rising
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