Annuity Update - Yields falling following Euro elections - May 2012 by Billy Burrows
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It is frustrating that annuities refuse to budge up. Yields had risen to the begining of May but annuity rates remain flat.
However since May 1st yields have fallen from 2.6% to below 2.5% suggesting annuity rates may be heading downwards
See chart of gilt yields
As a rule of thumb, for every 100 basis points rise or fall in yields annuity rates should rise or fall by about 8%.
The yield on 15 year gilts as quoted in the FT was 2.60% on May 1st compared to 3.92% a year ago. This represents a fall of 132 basis points and suggests a fall of over 10%. Our benchmark annuity rate (£100,000 joint life level annuity, M65, F 60) has fallen from £ 5.916 p.a. to £ 5,321 over the last 12 months which is a fall of 10%. It’s good when numbers add up!
However any hopes of annuity rates increasing have been dashed by the results of the recent elections in France and Greece as yields on UK gilts have nosed dived again. We expect insurance companies to cut annuity rates if yields continue to fall.
The statistics above are based on normal health annuities but these are now largely becoming relevant as more and more people are qualifying for enhanced annuities and those who don’t may benefit from postcode annuities.
Have you heard the one about the lady who faced a cut of 4% on her annuity because the postcode was wrong and she actually lived a few hundred yards away just across the road.
The point is that as more annuities are priced on individual circumstances it is harder to identify a standard rate and this will become even more difficult after RDR.
However this shouldn’t detract from the important point that more and more individuals are seeing their annuity rates increase if they have a medical condition but as a consequence those in good health or living in affluent areas are seeing the relative value of annuities falling. For these investors, investment linked and flexible options will become more important.