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21 February 2013 last updated
UK annuity rates rise 1.5% from Legal & General as gilt yields fall

Leading provider Legal & General increase UK annuity rates by 1.5% as equity markets and the 15-year gilt yields fall by 9 basis points, the largest fall in the last nine months, following comments from the US Federal Reserve.

The welcomed increase of standard annuity rates by 1.5% has been offset by falls in the equity markets after US Federal Reserve comments suggesting they will reduce the stimulus measures.

The 15-year gilt yields reduced by 9 basis points, the largest fall since May last year and greater than the fall in October when the Federal Reserve was considering not to start the current stimulus package.

The fall in gilt yields could also have been helped by the Bank of England announcing to extend Quantitative Easing (QE) by up to £175 billion as this will increase the price of gilts and reduce the yields resulting in lower levels for pension annuity rates.

UK annuity rates 1.5% higher
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Falling gilt yields will reduce annuities

Annuity rates are essentially based on the level of the 15-year gilt yields. The 9 basis point fall in gilt yields will mean annuities reducing by 0.9% at some point in the future at least in the short term.

Yields have been increasing this year starting at 2.31% and rising to 2.76% after Europe and the US pledged to create a free trade bloc which could increase GDP by 0.5% or 66 billion euros a year in Europe and a similar amount in the US.

The increase this year of 45 basis points would mean annuity rates should be higher by 4.5%, however, our benchmark example shows for a person aged 65 with £100,000 buying an annuity on a single life, level basis the income reduced to an all time low in January of £5,373 pa. Since then the rate has increased to £5,485 pa, higher by £112 pa or 2% and suggests it could increase by another £129 pa to a figure of £5,614 pa.

At least the increase so far has improved the lifetime income for pensioners and according to the Office of National Statistics (ONS) a male aged 65 will live for 17.8 years. The increase of £112 pa will improve his lifetime income by £1,993 with females longer life expectancy of 20.4 years generating £2,284.

The fall in gilt yields is likely to delay any further increases in annuities as providers are cautious and will wait to see the outcome of the US Federal Reserve stimulus package change and the Bank of England Quantitative Easing programme before changing annuities. If yields fall further this may mean providers either leave annuity rates where they are or reduce rates in the short term.

News related stories:
Pension annuity rates threat of £175bn QE from Bank of England
Enhanced annuities increase by 1.4% with more competition
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Impaired annuity provider Partnership with 2% increase in rates
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Related internet links:
Guardian - US uncertainty over QE3 threatens markets
Telegraph - QE may need to be raised by £175 billion
BBC - EU and US free trade talks launched
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