Does the current rise in bond yields directly impact annuity rates?

Important information -  the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

Q: Does the current rise in bond yields directly impact annuity rates? 

A: Global economic headwinds have caused turmoil in bond markets. Prices are down, which has caused yields to rise, which in turn has impacted the pricing of annuities.

The insurers that sell annuities typically underpin these investments with long-term corporate and government bonds (also known as gilts). So if the yields on these bonds rise, the insurers will be able to offer new annuities in the market at more attractive rates. 

You can see this effect gilt prices have had on annuities by looking at historical data. In January 2024, the yield on 15-year gilts stood at 4.2%. Today, yields are around 5%.

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At the start of the year, a typical ‘benchmark’ annuity — a joint-life annuity for a 65- and 60-year-old couple, offering two-thirds of the pension to the surviving partner and no inflation protection — would have generated a guaranteed income of just under £6,000 per year from a £100,000 pension pot.

Today, a couple of the same age, with the same-sized pension pot, could receive an income of £6,877. (The exact annuity rate paid depends on a range of factors, including age, with rates rising for older applicants, as statistically they have a shorter life expectancy.)

All of this seems like good news for those looking to convert their pension pot into a guaranteed income, as higher rates mean a bigger payout from the same pot of money. But there are a few important caveats to bear in mind.

The first is that while gilt yields have a significant effect on annuity pricing, they aren’t the only factor. Longevity expectations also play a role: if insurers expect annuitants to live longer, payouts may fall, so future medical advances, for example, could hit pricing. Market competition can also play a role.

It’s also important to remember that the economic factors causing havoc in bond markets — such as persistent inflation, concerns over government borrowing, and global market instability — are also impacting stock markets. This will have reduced the value of many savers’ pension pots. So, while annuity rates may be higher, when compared to a year ago, many people may be retiring with slightly smaller pension pots — making the gains less substantial.

This highlights the dangers of trying to second guess the market and delaying the purchase of annuities. Rates might go higher, but this is far from guaranteed, and your pension pot could be hit in the meantime. It is also worth bearing in mind that many economists expect central banks in the UK and abroad to start cutting interest rates later this year. This is likely to exert downward pressure on annuity rates.

Financial adviser and annuity expert William Burrows stresses the importance of taking a long-term view. Annuity rates are currently at their highest since the 2008 financial crisis. For those who value the security of a guaranteed income, now is a good time to consider locking one in — without worrying too much about whether you’ve hit the absolute peak.

Remember, you don’t need to use your entire pension pot to buy an annuity. Those who want some flexibility can secure an income by using a portion of their pension funds to buy an annuity, perhaps enough to cover essential bills, and leaving the rest invested.

And finally, when buying an annuity remember to always shop around for the best rate and ensure you are buying the most appropriate product for your circumstances. Make sure you also disclose any relevant health conditions or lifestyle factors, such as smoking or drinking, as these can increase your payout.

The Government’s Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at www.moneyhelper.org.uk or over the telephone on 0800 138 3944.

Fidelity’s Retirement Service also has a team of specialists who can provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.

If you’ve got a burning question you want to ask, why not drop us a line. Ask us your question.

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