Gilt yields tracker and impact on annuity rates

Written by Retirement Line

A number of factors influence annuity rates, and one of the most important of these is gilt yields. The good news is that gilt yields have been especially high for the past couple of years, giving a boost to retirement income from annuities.

If you are considering an annuity as a source of retirement income, you will know that the annuity rate is all-important. Annuity providers will offer you a rate that determines how much income you will receive from your annuity. 

Annuity rates differ from provider to provider, and each one will offer you a personalised rate based on your unique circumstances. Rates are also based on underlying economic factors – and current gilt yields are part of this.

What are gilt yields?

The UK government issues bonds as a way to raise money. When an investor buys a bond, they are lending the government money. 

The government will repay the loan (the principal) when the bond matures at an agreed date. With a ten-year bond, the loan will be repaid in ten years. In the meantime, the government will pay the investor a fixed rate of interest. 

Another name for these bonds is ‘gilts’ – and the yield is just another name for the fixed interest rate available to investors. A gilt yield of 5% will give investors an annual return of 5% if they hold the bond until it matures.

How do gilt yields affect annuity rates?

An annuity is typically a promise by the annuity provider to pay you a guaranteed income in return for money you have saved into your pension scheme. Annuities pay you this income for the rest of your life or for a fixed term. Various factors impact the annuity rate (and therefore income) that a provider offers you. 

In the case of a lifetime annuity, an important factor is the provider’s view on how long you might live: the shorter your life expectancy, the higher the annuity rate. To assess this, the provider will ask health and lifestyle questions that they will use to form their own view on your life expectancy.

The second and most significant impact is the return that the provider will earn on your money. To provide certainty that they can pay the income that they have promised, annuity companies will only invest in interest bearing assets for a long duration of time. Examples include government debt, corporate bonds (lending to companies) and infrastructure projects (building hospitals, schools etc.). 

The interest that these forms of assets will pay is all based on the rate offered by the government. This is because the UK government has always paid its debts. It is therefore regarded as the risk-free rate and any other form of debt will have to offer a higher rate to compensate for the risk that the interest will not be paid. Therefore, there is a very strong relationship between the gilt yield and annuity rates.

Gilt yields have tended to be quite low compared to some other investment returns. However, in the past couple of years, yields have risen considerably. That's because gilt yields are impacted by underlying economic conditions such as interest rates, inflation rates and government policy.

Annuity rates have also risen in the past few years – driven largely by these increases in gilt yields. When annuity providers benefit from higher gilt yields, they are able to offer you a higher annuity rate and income.

15-year gilt yield – 12-month tracker

Experts suggest that the 15-year gilt yield is a handy benchmark when looking at the relationship between gilt yields and annuity rates. So in the graph below, we look at the last 12-months of the 15-year gilt yield, alongside movements in annuity rates for the same period.

It’s clear that both gilt yields and annuity rates were relatively stable throughout 2024, maintaining a higher rate than has been the norm for much of the past decade or more. However, even during this stable period there were fluctuations.

At the end of October 2024 analyst Adam Button reported that UK gilt yields had risen to ‘the highest since 2023’. At the same time, Joseph Wilkins of FT Adviser was citing uncertainty about the UK’s Autumn Budget as a reason behind a recent rise in gilt yields. 

A few days later, Reuters reported that yields had hit another high mark due to investors’ anticipation of a Donald Trump victory in the US election. Yields had fallen back slightly by the end of November.

Sources: 

Gilt yields - MarketWatch data for the 15-year gilt yield at close of the first working day of each month.

Annuity rates - from Retirement Line’s in-house annuity quote system, generated on or near the first day of each month. Rate for a single life conventional lifetime annuity for a 65-year-old, using a Peterborough postcode (PE7 8JG), with level payments made monthly in arrears. Visit our annuity rates page for updates on rate changes.

15-year gilt yield – 10-year tracker

The gilt market has seen dramatic ups and downs in recent years, during a volatile period both politically and economically in the UK. The graph below shows just how closely aligned gilt yields and annuity rates have been over the past ten years, with significant yield/rate changes in that period.

A series of events contributed to the low interest rates and gilt yields seen until the past few years. These included the 2008 banking crisis and the EU referendum in 2016.

More recently, gilt yields have risen quite sharply in tandem with higher inflation and interest rates. Russia’s invasion of Ukraine and the ‘mini Budget’ of September 2022 have both been cited as contributing factors.

Sources: 

Gilt yields - average annual gilt yields based on the monthly-high yield data from Investing.com.

Annuity rates - average annual annuity rates from Retirement Line’s in-house annuity quote system. Rate for a single life conventional lifetime annuity for a 65-year-old, using a Peterborough postcode (PE7 8JG), with level payments made monthly in arrears. 

UK gilt yields – what happens next?

It’s clear from the above charts that gilt yields can react strongly to political and economic events. This illustrates the difficulty in trying to predict what will happen next. There will always be analysis of likely changes in gilt yields, interest rates and inflation, but ultimately nobody has yet invented an accurate crystal ball.

What annuity rate can you access?

Talk to one of our Annuity Specialists today for personalised quotes from the UK’s leading annuity providers, based on the very latest annuity rates.

For a free, no-obligation annuity quote, call us on 0800 652 1316, request a call back, or email us at info@retirementline.co.uk. Alternatively, use our annuity rate calculator for an estimate in seconds of the retirement income you can generate from your pension savings.

Sources:

Gilt yield movements, 2018-2022: The impact of rising gilt yields on pensions. Pensions Expert. Accessed 09/12/2024.

Adam Button on gilt yields at end of October 2024: UK gilt yields rise to the highest since 2023. Accessed 09/12/2024.

Joseph Wilkins on the impact of Budget speculation on gilt yields: Budget 2024: Gilt yields spike to 5-month high. Accessed 09/12/2024.

Reuters report on the impact of the UK election on gilt yields: UK bond yields hit one-year high on US election nerves. Accessed 09/12/2024.