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30 July 2012 last updated
UK annuity rates fall to lowest ever level as gilt yields struggle to improve

As gilt yields struggle to improve to levels at the start of the month, annuity rates have decreased by as much as 3%.

Providers have reduced annuity rates across the board with Legal & General reducing their rates by 1.5%-3%. This is a significant decrease as Legal & General have been the current market leaders for much of this year.

The last decrease was on 24 July with Canada Life reducing their annuities for the first time since 15 june. Legal & General remain the market leader as all other providers have also reduced their pension annuity rates. Other providers reducing their rates have been Liverpool Victoria by with their smoker annuities lower by 1.5% and Partnership reducing by up to 2.6%.

The reductions have been due to the significant falls in gilt yields and in particular the 15-year gilt yields for which annuity rates are primarily based.

Annuity rates fall to lowest ever levels
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Annuity rates are expected to reduce further

With gilt yields reducing from 2.29% at the beginning of the month they have reduced to 2.12% today, a fall of 17 basis points and as a rough guide this would result in a reduction in annuity rates of about 1.7%. Gilt yields decreased by 55 basis points in May and annuity rates have not fully reflected this fall so the likely hood is for rates to fall further. For the latest updates see Annuity Rates Review.

This is a difficult time for pensioners retiring now as annuities continue to fall. An open market option can generate a standard annuity that is 20% higher than the current provider and up to 50% higher for impaired annuities. However, as it may take up to four weeks to transfer the funds from the existing provider to the new provider there is a risk that the quote will expire and new lower annuity rates will apply. The lower rate would apply for the lifetime of the pensioner although it is likely the rate will remain higher than they were offered from the current provider as their rates would also have reduced.

Investors doubt ECB commitment

Since the ECB pledged to save the euro markets around the world have rallied and Europe is higher by up to 2.7%. However, investors are beginning to doubt the ability of the ECB to deliver and so the increases are not so significant. Spanish 10-year bonds are much lower than the 7.66% yield attained on 24 July and are now at 6.64% and under the 7% danger level where a bailout would be required, currently expected to be around 300 billion euros for Spain.

The ECB may restart the Securities Markets Programme (SMP) which involves buying bonds from financial institutions and thereby reducing the borrowing cost to countries of issuing bonds. This would reduce the yields on European bonds and if confidence increases could mean investors will move funds from safe havens such as UK government bonds and gilts to Europe. This could decrease the price of gilts and increase the yield which would mean annuity rates rising slightly later in the year. The combined effect of rising pension annuities and equities would significantly improve the income of pensioners at retirement.

News related stories:
UK annuity rates fall up to 1.9% as Spain's bond yields soar
Impaired annuity rates react and fall to bailout for Spain
Annuities pressured as 15-year gilt yields at all time low
Impaired annuity rates fall 1% after week of declining gilts
Current annuity rates threatened as gilt yields decrease
Related internet links:
Guardian - Markets up on ECB action
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