Falling gilt yields bad news for annuity buyers

Investors seeking a safe
haven amid the global equity market turmoil have been switching
aggressively into government bonds, in the process driving their
yields down to either multi-decade lows or near lows.

In the US, for example,
10-year Treasury bonds are now trading at around 2.5%, not far off
the low of 2.1% seen in December 2008. In the UK, 10-year gilt
yields of around 2.7% are at multi-decade lows.

This spells bad news for
annuity rates.

“[In the UK] it can only be a
matter of time before insurance companies start cutting their
annuity rates,” stressed Billy Burrows, a director of financial
advisory firm Better Retirement Group.

He continued: “The gross
redemption yield on 15-year gilts fell from over 4% in mid-April,
to just over 3.5% on 1 August.

“As a rule of thumb, a 50 basis points fall in yields
should result in approximately 5% fall in annuity rates, but rates
have only fallen by a fraction of that amount.”

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