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Are annuity rates rising? The causes and effects

We look at how to secure the best annuity rate and what factors impact the rates you can get.

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.

An annuity is a type of retirement income product that you buy with some, or all, of your pension pot. It pays a regular guaranteed taxable income either for life or for a set period. But declining rates have made them less popular in recent years.

Rates can change regularly, but recently they’ve shown signs of improvement.

Factors like the size of your pension pot, age, health and lifestyle details as well as gilt (government bond) yields, can all influence the annuity rate and income you can get. Here’s how.

This article isn’t personal advice. If you're not sure what's right for you, get guidance from Pension Wise or ask for financial advice.

How gilt yields impact annuity rates

Annuity providers buy gilts to underpin annuity payments. This means that the income paid by an annuity is linked to the yield which is generated from the gilt. Lower yields result in lower annuity rates.

Gilt yields took a sharp downturn at the start of the pandemic as investors rushed into ‘safer’ investments like bonds, driving the prices up. But as lockdown restrictions start to lift, and the outlook for the economy is looking a little brighter, yields have been rising. Take a look at the chart below.

10-year UK gilt yield

Past performance isn’t a guide to the future. Source: Refinitiv Eikon, to 22/04/2021.

As a result of rising gilt yields, we’ve seen an increase in the rate annuity providers are prepared to offer.

A 60-year-old with an average life expectancy could have purchased an annuity in March 2021, and received 3% more income compared to the same annuity the year before. If they purchased an annuity for £100,000, that’s around £223 of more secure income every year. Across 20 years that’s an extra £4, 460.

Annual annuity income from a £100,000 pension

Source: HL data.We generated these quotes using our online annuity quote tool between 25 April 2019 and 22 April 2021. Quotes are from our panel of annuity providers. All quotes are for a single 60-year-old based on a £100,000 single life, level annuity with a five-year guarantee built in, paid monthly in advance.

How age, health and lifestyle impact rates

Your age, and the health and lifestyle details you give when getting a quote, will affect the annuity rate and income you’re eligible to receive. Rates tend to be higher the older you are and those with certain medical conditions or health issues often qualify for an enhanced rate. Even being a smoker or liking the occasional drink, you could boost your rate.

Annual annuity income from a £100,000 pension

Source: HL online annuity quote engine. 1 April 2021. Quotes are from our panel of annuity providers. All quotes are for a single life annuity, paid monthly in advance, with no escalation or guarantees built in. Quotes are for a single 65-year-old living in an area with average life expectancy. The health details added are alcohol consumption of 7 units a week and a Body Mass Index of 27.

Remember, annuity rates change. There’s no guarantee that future rates will be higher than the rate you could get now.

More on enhanced annuities

When is the right time to buy an annuity?

Although rates are rising, the right time to buy an annuity really depends on your circumstances. We think a good time to look at buying an annuity is when you give up work completely. You’ll no longer have a steady income stream from earnings to cover your essential bills. An annuity can help plug this gap.

Annuity purchases aren’t an all or nothing approach. You could think about buying several smaller annuities using a bit of your pension at a time. This lets you gradually de-risk your pension. It reduces the risk of locking all your money into an annuity at one point in time, or when rates are low, and allows you to shape your retirement based on your changing circumstances.

It’s a good idea to regularly get quotes after you finish work. It can help you to keep an eye on ever-changing rates to secure the best deal. There’s no obligation to buy an annuity after you request a quote, but the rate on the quote will only be guaranteed for a limited time.

It’s vital you shop around to get the best rate available. Rates vary between providers and your current pension provider might not offer you the most for your money. You can compare quotes from across the market using our online annuity tool. Your quote will show you exactly how much income you could get every year.

Once you buy an annuity, your income is fixed for the rest of your life. It will only change if you build in certain annuity features so make sure you consider your options carefully.

HOW TO GET A QUOTE

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. From age 50, you can get free and impartial guidance from Pension Wise.

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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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