Annuity rates 'could hit rock bottom' as gilt yields plunge

Pensioners who take out an annuity are earning thousands of pounds a year less than previous retirees following a dramatic shift in interest rates in recent weeks.

Older homeowners with equity release mortgages are also suffering, as the cost of leaving their plan has spiralled.

Annuities, which offer older people an income in retirement, are priced according to the returns offered by “gilts”, which are bonds issued by the Government.

In recent weeks, concerns about the economy have caused investors to buy more gilts, which are seen as a safe haven.

This has depressed the yields they offer, with 10-year gilts rates falling from 1.3pc in February to around 0.45pc today. This, in turn, has caused annuity rates to fall.

Billy Burrows of Better Retirement, a financial adviser, said: “Ten years ago the benchmark annuity, bought with £100,000, would have paid more than £6,000 a year before tax.

“Today, the same annuity would only pay a little more than £4,000 a year.”

Mr Burrows said the lowest point ever for annuities was after the EU referendum in June 2016, when the benchmark annuity income fell to £3,800 a year. He predicted that rates could soon fall even lower than that.

The fall in gilt rates is also having dire consequences for equity release customers looking to escape their loan. Exit penalties are often inversely linked to gilt yields, meaning that as these rates fall, the fees charged to older homeowners increase.

But lower gilt rates are good news for those considering a new equity release plan, according to Ray Boulger of John Charcol, a mortgage broker.

“The fall in gilt yields is bringing in lower rates for new equity release borrowers as well as for other fixed-rate mortgages,” he said.