Annuities facing a plunge in rates as returns from government bonds fall

Falling: Rates on annuities

Falling: Rates on annuities

Retiring workers planning to turn their pension into an income for life face a plunge in payouts.

These annuities are tipped to drop soon as a result of falling returns in government bonds.

It means retirees taking their pension today may end up with a bigger income than people who wait a few months more.

Insurers use returns on UK government bonds called gilts as a way of pricing annuities. Firms buy these investments and use the returns to pay an income to pensioners. 

However, yields on 15-year gilts have fallen by about a fifth since spring. Experts attribute this to the economic recovery.

When times are tough, investors snap up government bonds because they provide a safe place to invest cash. Rates are generally higher at times like this because there is more demand.

But when the economy gets better, government bonds are in less demand and the returns they pay fall.

If gilt yields drop, it does not always mean pension payout rates will do the same.

However, this is generally the pattern that insurers follow. Annuity rates have fallen off a cliff over the past two years.


A 65-year-old with a £100,000 pension pot will currently receive £5,988 a year. In 2008, when gilt yields were nearly twice as high, this would have meant an annual £9,000.

Tom McPhail, of investment firm Hargreaves Lansdown, says: ‘When you look at the figures you can see that over time annuity rates have tended to follow gilt rates pretty faithfully.

Rates haven’t moved since the summer, but they look likely to fall again.’

From April 2015, eligible pensioners will be able to use pension freedoms to do what they like with their pension cash.


Annuities facing a plunge in rates as returns from government bonds fall

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