Do you know enough about a pension annuity, and how do UK pension annuity rates work? Confusingly, a pension annuity is what many people would think of as a ‘pension’, and it pays you a regular income in your retirement. When you decide to start drawing your benefits from a pension fund, an annuity is the most common way to do it. You can buy an annuity with any form of cash lump sum, but on this website we are only looking at straightforward conventional pension annuities. The concept of annuities is that you exchange a lump sum (your pension fund) for a guaranteed income for the rest of your life in retirement.
And, importantly, once you have purchased the annuity it cannot be altered or converted in any way. This is why it is so important to make the right choices, as you only get this one chance. The benefit of doing this, I suppose, is that you have no further worries about any potential investment risk, which is something that you probably won’t want to worry about as you get older. If you rely on the interest from cash savings in a deposit account for your income, then you can be caught out if interest rates change dramatically, as they have done only recently. Annuity income is fixed for life; the rate you get at the outset doesn’t vary.
UK pension annuity rates are the rates the insurance company (annuity provider) use to determine how much income they will pay you in exchange for your hard earned pension fund. If you have a pension fund of £100,000 and they exchange it for an income of, let’s say, £7,000 per year, this represents an annuity rate of 7%. One important factor determining what annuity rate you get is their estimation of how long you will live. This means that pension annuity rates for women are lower than those for men (because women statistically live longer).
UK annuity rates are also lower for younger people, for precisely the same reason. Conversely, if you have health problems, severe or otherwise, or you are a smoker, you can get enhanced annuity rates based on your lower than average life expectancy. Because people are generally living longer these days due to improvements in medicine, there is a downward pressure on annuity rates which is unfortunately likely to continue. The other main factor is interest rates, or, more precisely, long gilt yields. This is the yield (referred to as the interest rate) payable on long term government bonds, or ‘gilts’. Gilts are used by the insurers as an investment to produce the required income to pay their annuity policyholders. If the income payable from gilts reduces, then annuity rates will tend to fall.
