Annuity rates hit by US and euro crises

Annuity rates could hit their lowest point for two years as the sovereign debt crises hits gilt yields.

The US senate approved a new debt ceiling on Tuesday night after tense negotiations on the spending cuts the government will have to impose as a result.

However, the debt deal did little to calm the markets on Wednesday as the FTSE fell 90 points to 5,629 this morning and the Dow Jones fell 35 points to 11,831.

Fears following the Franco-German restructure of Greek debt in late July have taken their toll on gilt yields.

The yields on ten year gilts hit 2.75% from 2.99% last week, whilst 15 year gilt yields fell to 3.39% from 3.56% last week.

Fear of losses from global equities has caused a flight to gilts, driving up prices and forcing down yields.

The GAD rate, on which providers base their annuity rates, is in turn set using gilt yields.

"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. This means that we can expect annuity rates to be cut very soon," said Billy Burrows, director of Better Retirement Group.

Gareth James, technical marketing manager at AJ Bell, said this could mean the GAD rate will be set at 3.25% for September, which is the lowest it has been since March 2009.

However, he stressed the GAD rate is not set until the 15th of each month, and so there is a possibility of recovery.

Despite this, in the past ten days annuity providers have already cut their rates in response to falling gilt yields.

Aviva and Just Retirement have confirmed they will cut annuity rates this monthand others are expected to follow.

Just Retirement confirmed it will cut some of its rates by between 0.5% and 1%.

Aviva cut its rate for a male inflation-linked annuity at age 65 from £3,259.17 to £3,208.83 on 3 August.

Tom McPhail, head of pensions research at Hargreaves Lansdown, said: "For anyone contemplating buying an annuity in the immediate future there appears to be a strong argument for moving sooner rather than later.

"Annuity quotes are normally guaranteed for at least two weeks, though some companies will hold their rates for up to 45 days."