Gilt yield drama makes rising annuity rates ‘hard to ignore’

Dramatic spike in government borrowing costs

January started in dramatic fashion for government borrowing with a significant cost spike which saw the 15-year gilt yield standing at 5.17%, compared to 4.23% on the same date the previous year.

Uncertainty about the performance of the UK economy and the ramifications for inflation after Donald Trump returns to the White House are some of the factors cited by analysts as the reasons for the drama.

Rising borrowing costs do, however, give the annuity market renewed lustre.

AJ Bell director of public policy Tom Selby commented: “The recent spike in government borrowing costs is in danger of turning into a political disaster for Rachel Reeves, who will no doubt be sweating over the risk that any wiggle room in public finances could evaporate.

“Anyone borrowing money, particularly those looking to get on the housing ladder or with a mortgage that is pegged to the Bank of England base rate, will also be watching nervously.

“However, there will have been plenty of people cheering as gilt yields jumped to highs not seen since the 2007/08 financial crash.”

He said while annuities “languished in the doldrums throughout the 2010s” rising yields would filter through to improved rates.

Higher rates to maintain or increase over 2025

Annuity rates are largely linked to the return on government gilts, so the guaranteed income section of the retirement income market is having a great start to the new year.

Provider Canada Life explained that as a rule of thumb, a 30-basis point rise in yields on gilts would increase annuities by about 3%

Canada Life retirement income director Nick Flynn said: “Additional government spending, global uncertainty and higher taxes are all contributing to the recent increase in the cost of government borrowing.

“Whilst there are no cast-iron guarantees, if this trend continues, then it’s a strong possibility that annuity rates will be maintained or even increase in 2025.”

Its data showed at the start of 2024, a Canada Life benchmark lifetime annuity with a £100,000 purchase value would have paid an income of about £6,400 a year for someone aged 65 with no health or lifestyle conditions to declare.

It added that if the same person were to purchase a Canada Life lifetime annuity now, improved rates would mean that they could expect around an additional £8,200 in income over a 20-year period.

Just Group group communications director Stephen Lowe said rates were at their highest in about 15 years making them “hard to ignore for retirees”.

He added they were a “useful benchmark for comparing the merits of other income options that may involve more investment risk and higher fees”.

According to data from Just Group, a healthy 65-year-old with a £100,000 pension could currently secure a guaranteed income of £7,364 a year, about £100 more income than a month ago and around £750 more than this time last year (that could equate to + £15,000 more over a typical retirement period compared to a year ago), said Lowe.

“Pension savers can buy as much annuity income as suits their circumstances. Advisers often suggest that people aim to have sufficient income from secure sources – state pension, defined benefit pensions and annuities – to cover their basic living costs such as utility and food bills.

“Discretionary spending – treats, holidays, gifts – could be funded by any remaining pension or savings and could be cut back if investment growth was poor.”

On the back of a stellar 2024

Hargreaves Lansdown head of retirement analysis Helen Morrissey agreed the bond market turmoil had caused annuity incomes to soar “giving an extra boost to a market that has already enjoyed a stellar year”.

She explained the latest data from Hargreaves Lansdown showed a 65-year-old with a £100,000 pension could get up to £7,425 a year from a single life level annuity with a five-year guarantee. This is up from £7,235 a year last week and up a whopping 48% on the £5,003 that was on offer this time three years ago.

Morrissey added: “We could see further income rises in the weeks to follow and this could push incomes up to the highs we saw in the aftermath of the Mini-Budget.

“Annuities continue to provide great value, and we can expect to see interest in them continue to increase, with many retirees deciding that now is the time to take the plunge and get a guaranteed income for life.

“However, it is important to look before you leap. Once bought, an annuity cannot be unwound and different providers offer different rates. If you take the first quote offered without checking the rest of the market, you may find you’ve made a costly mistake.”

She agreed that partial annuitisation could make sense for clients with the remainder staying invested through income drawdown.

Lowe also highlighted the importance of shopping around. He pointed out that it was unlikely a client’s pension provider would offer the highest rates.

“Our own analysis suggests the most competitive provider will pay between 10% to 20% more than the least competitive depending on age, adding up to many thousands of pounds over a lifetime. These days there is really no such thing as a standard annuity rate – the amount of income is personalised depending on [a client’s] own circumstances and requirements,” he said.

Jenna Brown (Professional Adviser)

Retirement ProfessionalsGilt yield drama makes rising annuity rates ‘hard to ignore’