What are Annuity Rates?

5 minutes

Annuity rates are the factors that determine how much income you will get from an annuity over its duration. They are affected by areas such as interest rates, your health and the age at which you took your annuity out.

Annuity rates are fixed from the point when you took your annuity out, meaning once you’ve taken it, it’s fixed for the remainder of the annuity term. Before you buy an annuity, it’s worth gaining an understanding of how annuity rates work, and what could affect the amount you get.

This guide focuses generally on annuities to provide an overview of how an annuity works, and how annuity rates are considered. Lifetime annuity rates and fixed annuity rates are calculated differently, and as such, some of the items we list below may not be applicable to the type of annuity you choose.

But, before we get into what affects the annuity rate you’ll get, let’s recap on what an annuity is.

The information on this page should not be considered as financial advice. If you are unsure what’s right for you, please make sure you speak to a financial adviser.

What is an annuity?

An annuity is a type of financial investment at the point of retirement that provides a guaranteed income over a specified period of time. Often purchased using a portion of a person’s pension fund, an annuity can be a way to receive a good retirement income.

What affects annuity rates?

As we covered, annuities are a type of financial investment, and with any financial investment, they come with a return rate. Unlike a savings account or ISA, which may change regularly, annuities are often fixed at the point of purchase.

The annuity rate you could get can be affected by the following factors:

1. Pension pot size

Ultimately, the amount of annuity you can get starts with the amount of funds available in your pension pot. While you don’t have to use all your pension pot to buy an annuity, it’s worth having an understanding of how much your pension pot can get you.

2. Your age

The earlier you take your annuity, the lower the monthly payments will be on average. A £200,000 pension pot taken at 55 will buy you less than the same value pension pot bought at 75 years old.

3. Flexible options you select

When you take out an annuity, you’re able to choose a variety of options, including the payment frequency and whether you want an annual increase or not. These options are completely up to you, but many people choose to speak to a retirement specialist to help them decide on which route would work best for them.

With your payment frequency, you can choose monthly, quarterly or annually. This allows you to receive the money in a way that suits you and your financial planning. For someone who may already have a secure monthly income, you might want the money yearly for a large purchase, or to give you the flexibility to get through a more financially challenging time for example.

Then, you can choose whether you want an annual increase, known as an escalating annuity, or keep a fixed annuity percentage, called a level annuity. Escalating annuities can protect against inflation and provide an income that provides you with greater buying power. A level annuity provides a fixed percentage increase, regardless of whether it is higher or lower than inflation.

Finally, you can add value protection or guaranteed periods to your annuity to protect the value of your fund to help family members or beneficiaries.

4. Any advice fees you pay

Financial advice, as regulated by the FCA, often comes with a fee, either for the advice upfront or once you’ve taken out a product. This fee will be provided transparently, and if you are unclear about any fees you might need to pay, always ask, and your adviser should tell you. They may have an option to pay the fee monthly, or even have a retained option where you can speak to them regularly to help with your financial health.

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5. Interest rates and gilt yields

Interest rates have been increasing through 2022 and 2023, and as such, annuity rates are currently higher than in previous years. The economic conditions at the time of taking out your annuity tie into this as well.

Gilt yields, the return you get from purchasing government bonds, also provide income for pension and annuity providers and are financed through the buying and selling of government bonds.

6. Your health and lifestyle

If you have certain illnesses such as high blood pressure, diabetes, or are a smoker or overweight, you may be eligible for an enhanced annuity. An enhanced annuity provides you with more money over the term of your annuity. By carefully and thoroughly disclosing your medical information, you may be eligible for more than you expected.

How are annuity rates calculated?

When you have chosen your annuity provider, they will ask you a series of questions. To help you get the best rate, it’s best to answer questions as honestly as possible. Declaring any medical conditions, including providing letters from doctors, can help to qualify you for an enhanced annuity.

You’ll also be asked about where you live, your lifestyle and any partners you have. Once these questions have been answered, then your annuity provider can look at the current annuity rate based on the interest rates, and let you know what you will be offered.

What could you get with your money?

Our annuity calculator can provide you with an estimate of what you could get based on the information you provide and today's annuity rates.

Why not try our annuity calculator here today?