What is an annuity rate?
Annuity rates determine the amount of regular income you will receive in return for your UK pension savings.
They are displayed as to how much money you’ll get every year for every £100,000 you pay in.
An annuity rate of 5% would mean you’ll get £5,000 for every £100,000 you invest, if you paid an annuity provider £50,000, you would receive £2,500 a year.
Annuity rates compared
To assist you figure out how much you could receive from an annuity, we have compared the current rates on offer from 5 companies, the data is correct as of July 2019.
In this example, we’ve looked at:
How much a healthy 65-year-old could get for a single-life annuity with £100,000
How much a healthy 65-year-old could get for a joint-life annuity with £100,000
How much a healthy 65-year-old could get for a joint-life annuity with £100,000 which rises by 3% each year
Single-life annuity – £4,914
Joint-life annuity – £4,653
Joint-life annuity with 3% rise – N/A
Single-life annuity – £4,806
Joint-life annuity – £4,483
Joint-life annuity with 3% rise – £2,906
Single-life annuity – £4,792
Joint-life annuity – £4,516
Joint-life annuity with 3% rise – £2,969
Single-life annuity – £4,384
Joint-life annuity – £3,931
Joint-life annuity with 3% rise – £2,558
Legal & General
Single-life annuity – £4,704
Joint-life annuity – £4,335
Joint-life annuity with 3% rise – £2,806
How are annuity rates calculated?
1. Life expectancy
Annuities work like insurance – all the customers’ money is put into a single pool and paid out until you die. They are a guarantee of an income for life, so the rates they are based on change as life expectancy varies. People who live longer get a bigger share, and people who die sooner get a smaller share. This is reflected in annuity rates. The longer you are expected to live, the lower your rate, because the provider will be paying you for longer. Therefore, a 60-year-old will generally receive a lower income than a 70-year-old.
2. Your health
This is linked to your life expectancy. If you are in poor health, smoke or have any another condition that will impact on your health, you will be expected to live for a shorter time, so you will receive a better annuity rate. The same applies if the 2nd person in a joint-life annuity or the dependent of an annuitant suffers from ill health or has a medical condition. Enhanced annuities work on this basis and can secure you up to 30% more income.
3. Interest rates
The lower interest rates are, the lower annuity rates are. This is because pensions are partly funded by the interest earned when your money is invested, so you will get less for your money when rates are low. Currently, the base rate is just 0.10%, so annuity payments have been reduced.
4. Gilt yields
Annuities are also partly funded by government bonds (known as gilts) which insurers buy. In return, the government pays the insurers a fixed amount of interest, which is tied to the base rate and inflation. So when the base rate and inflation are low, gilts become more expensive and the rates of interest or yield falls. Movement in gilt yields will impact the annuity rates on offer. Lower yields result in lower rates and vice versa.
Should I choose an annuity with the highest rate?
When analysing annuity rates, you will find that the highest rates are on offer for the most basic of annuities.
The more features you add onto an annuity – such as securing an income for a partner or ensuring your annuity payments rise with inflation – the lower your rate will be.
For example, a single-life level annuity will pay out the same income every year, without rising to meet inflation, and then will stop paying out when the buyer dies.
These tend to have the highest rates because annuity companies know they only have a set amount to pay out for the lifetime of one person.
If you add a guarantee, that if you die within 5 or 10 years of taking out the annuity, it will pay out to a nominated person – that will slightly reduce your rate, as the annuity provider will have to pay out for as long as the guarantee lasts.
Your annuity rate will drop further if you get a joint annuity because the annuity will have to pay a proportion of the income you receive to your spouse or civil partner when you die, extending how long the provider has to pay out for. The rate can also be influenced by the age and health of your partner.
Finally adding an inflation-link to your annuity means that your payments will rise by either inflation or a fixed-percentage each year. These will reduce your rate significantly in your first year because the annuity provider has to increase your payments every year of your life.