31 May 2022 last updated

Pension annuities up 23pc as base rates to rise due to higher oil prices

Annuities are 23% higher since the low in January 2021 as investors expect base rates to rise

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Pension annuities rise 23% since the lockdown low in January 2021 as investors expect higher oil prices to force central banks to raise rates further.

From the start of 2022 providers have increased annuity rates by 15.8%. Since a recent low in January 2021 annuities are 23.1% higher to the benefit of people currently making their retirement plans.

This is due to investors expecting central banks to increase rates further as the EU agrees a deal to ban Russian oil delivered by sea which represents two-thirds of all imports by the end of the year, with the risk of increasing inflation.

If you include oil imported from pipelines, the total blocked increases to 90% and this has been pledged by Poland and Germany which could end a large source of funding for Russia.

Find related news here:
Ban on Russian oil sends gilt yields to 2.4pc and higher annuity rates
Gilt yields rise to 2pc as investors expect central banks to increase rates

Annuity rates have reached a high of £5,893 pa for our benchmark based on a person aged 65 years old with a fund of £100,000 buying a lifetime annuity on a single life, level basis and compares this to the 15-year gilt yields.

Fig 1: Chart comparing annuity rates and 15-year gilt yields

The above chart compares the 15-year gilt yields to our benchmark annuity which is £1,107 pa or 23.1% higher than in January 2021 when it reduced to a recent low of £4,786 pa.

Over this period of time gilt yields have increased 18.6% suggesting providers are particularly aggressive this year with their pricing and rely on yields to rise in the future.

Investors have been selling treasury notes, gilts and bunds and want a better yield as inflation reaches a 40-year high in the UK and US forcing central banks to raise base rates from all time lows.

The 15-year gilt yields has increased in the last six consecutive months by 145 basis points from 0.97% at the end of November 2021 to 2.42% by the end of May.

The unfolding events with the economy recovering from lockdown and the Russian-Ukraine war has fueled inflation and offers an opportunity for those retiring to secure a much higher income for their lifetime compared to a year ago.

In terms of total income during their life for our benchmark annuitant aged 65, the Office of National Statistics (ONS) would expect a male to live for 18.8 years and he will have £20,811 more over his lifetime by taking an annuity now compared to a January 2021. For a female she can expected to live for 21.2 years increasing her lifetime income by £23,468.

As providers are increasing annuity income at a higher rate than the rise in gilt yields, there is a risk pension annuities could correct downwards if inflation falls. This would indicate the Federal Reserve may not raise base rates by further 0.5% amounts after the summer and gilt yields may fall back slightly followed by annuity rates.