Investors switching out of equities at the prospect of rising interest rates could force annuity rates to fall, warns the Annuity Bureau, as rising demand for gilts pushes down the yields on which annuity rates are based.
Gilt yields have recently been at their highest since mid-2002, the Bureau says, with annuity rates currently “several hundred pounds higher than they were a year ago”.
Rates have been raised in the past month by British Life, GE Life, Legal & General, Norwich Union, Prudential and Canada Life, the Bureau notes.
However, the status quo is threatened by a possible rush into gilts sparked by interest rate fears in the US.
Another issue is longevity: gilt yields may be the same as they were in mid-2002, but purchasers of annuities are still getting roughly 80 basis points less on average - £7532 versus £8,283 – which the Bureau blames on annual increases in longevity.IFAonline
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