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What's happened to annuity rates?

We take a look at what impacts annuity rates and when you should think about buying a secure income.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

An annuity is one of the only ways you can get a secure income from your pension. You can swap your pension pot with an insurance company for an annuity – a secure income for life.

Annuity rates determine how much regular income you’ll get when you swap in some or all of your pension pot. But, what influences these rates?

Annuity rates change regularly, and they’re calculated based on a number of different factors. It’s not just the size of your pension that will affect how much income you’ll get. It’s based on your age, your life expectancy, your health and lifestyle, as well as Gilt yields and interest rates. Crucially, fluctuations in the stock market itself don’t tend to have a direct impact on annuity rates at all.

The most important thing to note, is that once you’ve bought your annuity, the income is fixed for the rest of your life, it won’t change unless you’ve opted to increase it every year. It also cannot usually be changed or cancelled once bought, so please consider your options carefully.

Remember, pensions are long-term investments to fund your retirement; you cannot normally access your money and buy an annuity until age 55 (57 from 2028).

This article is not personal advice. If you are unsure, please ask for advice.

What impacts annuity rates?

Age and life expectancy

Annuity rates are linked to life expectancy. The longer you’re expected to live, the lower the annuity rate you’ll receive. For this reason, someone in their 60s would generally get a lower annuity rate than someone in their 70s or 80s. This means the older you are, the more income you’re likely to receive.

Health and lifestyle details

As you’ll tend to get a higher annuity rate if you’re not expected to live as long, insurers take into account your health and lifestyle before getting a quote. Typically unhealthy lifestyle choices or health conditions lead to higher premiums on insurance products. But an annuity is an insurance product like no other. You’re likely to end up with a higher annuity rate if you disclose these details.

There are lots of common health conditions that could increase your annuity rate, like high blood pressure or high cholesterol. Even confirming details like how much alcohol you drink or your height and weight could mean you’ll get a better rate.

More on enhanced annuities

Gilt yields

The insurance companies (annuity providers) buy secure investments such as Gilts (government bonds) to support the guaranteed income they provide. The Gilt yield is the amount of annual income the insurer gets when they buy them. If these yields are high, they can pass this onto you with higher annuity rates, but if they’re low, the annuity rates can be lower.

Gilt yields can fluctuate based on demand. Changes in interest rates can also influence the yield on Gilts but this isn’t always the case. The chart below shows the trend between Gilt yields and the annuity rates available for a healthy 65 year old.

Annuity Rates and Gilt Rates

Scroll across to see the full chart.

Past performance is not a guide to the future. Source: Thomas Reuters Eikon to 31/03/20 and HL Annuity Index to 26/03/20.

Market competition

Competition between annuity providers also impacts annuity rates – just like you’d expect when buying other types of insurance.

There are currently six annuity providers in the open market and the golden rule is to make sure you shop around to get the best quote. In fact, we suggest you should get quotes regularly on the run up to retirement to make sure you’re aware of what’s on offer and to help your planning.


How have annuity rates changed since the cut in interest rates?

In a bid to help boost economic demand during the coronavirus outbreak, the Bank of England slashed the UK base rate. It first cut the base rate from 0.75% to 0.25% on 11 March and then a few days later on 19 March reduced it again to 0.1% – pushing it to the lowest level in history.

Since this announcement, we’ve already seen two annuity providers drop their rates slightly. The standard annuity pay-outs for a 65 year old have also reduced by around 4% following the rate cut too.

A guaranteed income come rain or shine

For lots of people in retirement, annuities have become the less popular retirement option since the introduction of pension freedoms. But their perceived value has shot up over the past few weeks.

Once you secure your annuity rate, you’ll receive a secure income for the rest of your life, no matter what happens in the stock market. It can be easy to undervalue security and certainty when the stock market is rising. But there’ll be people approaching retirement or drawing on their pension who, especially after seeing these market falls, don’t want to be worrying about such things. Instead, they prefer the guaranteed income of an annuity.

Remember, that anyone thinking about an annuity now could be facing a lower income because their pension has fallen in value.

When would be a good time to buy an annuity, if at all, and how can you get the best rate?

In reality nobody knows if annuity rates will get better or worse in the short term. But what we do know is that rates tend to be higher for older people. As you age, you’ll potentially develop health conditions which could mean you’ll secure a higher annuity rate and more income.

It’s worth getting annuity quotes regularly once you’ve stopped working. It will help you to keep an eye on ever-changing rates, plus it won’t cost you anything. Remember though that quotes change regularly and will only be guaranteed for a limited time.

It’s also important to remember that buying an annuity isn’t an all or nothing approach. You could think about using your pension to buy slices of annuities. This will help spread the price at which you buy guaranteed income and retain flexibility. It’s a little like drip feeding money into the stock market when you’re building up your pension, whilst also allowing the remaining pension pot to recover from any drop in value.

Shopping around for the best annuity rate is absolutely critical as the difference between the best and worst rates can be significant. Our online annuity tools can help you compare quotes from across the market in minutes.

Online annuity tool

What you do with your pension is an important decision that you might not be able to change. You should check you're making the right decision for your circumstances and that you understand all your options and their risks. The government's free and impartial Pension Wise service can help you and we can offer you advice if you’d like it. The information on our website isn’t personal advice.

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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