Bad news for Annuity rates as UK gilt yield drops to record low


In a move almost unthinkable this time last year the UK was yesterday seen as a safe haven for many of the world’s investors. Amid mounting concern over US and European debt, the interest rates on UK government debt fell yesterday to a record low.

The yield on 10 year gilts, generally accepted as the benchmark Government Bond, fell to 2.76% yesterday.

Britain’s 10 year gilts are now trading at just 0.10% above US treasury bonds, the average over the past two years has been 0.27%.

The reason for the fall in UK gilt yields can be found in disappointment over the US debt deal, which many believe will hamper global growth and also concerns in the Eurozone, particularly with regard to Greece, Spain and Italy.

At the same time Sterling strengthened against the dollar and gold prices rose to an all time high, a sure sign investors are nervous.

Annuity rates

Whilst the Treasury welcomed the news, with a spokesman say: “By taking difficult decisions to deal with our debts, Britain has been a safe haven during recent international storms.” those people coming up to retirement may well be less thankful.

Any Annuity rates comparison over the next few months could well show that the fall in gilt rates has reduced the level of income provided by an annuity.

The two main options chosen by retirees for converting their pension into an income are an Annuity and also Income Drawdown; both of which are affected by gilt rates.

Insurers use gilts to underpin the Annuities they offer, with lower gilt yields meaning a lower level of income can be offered. The maximum level of income which can be taken from an Income Drawdown plan is set by the Government’s Actuarial Department (often referred to as the GAD limits) which is set with reference to gilt rates. Again, lower gilt rates will mean lower levels of income are available from Income Drawdown plans.

Use of a pension Annuity calculator will show the level of income a retiree can expect from an Annuity today. What cannot be predicted is the future direction of Annuity rates, although lower gilt yields will do nothing to increase Annuity rates in months to come.