The best UK pension annuity rates; what affects them, and why do they vary so much over time? I suppose you could think of pension annuities being like mortgages in reverse, where you loan an insurance company (annuity provider in this case) your capital and they contract to pay you back a mixture of capital and interest over the rest of your life. Just like a mortgage, when Bank of England interest rates are high your mortgage payments will be higher and if interest rates are lower your mortgage payments will be lower.
However, there are some very important differences. Once you buy an annuity the UK pension annuity rates applied to it are fixed so even if annuity rates go up in the future your income payments stay the same. Secondly annuity rates are priced differently than any mortgae comparison, that is according to the yield on long dated gilts and other fixed interest investments, not the bank interest rate. This can be somewhat confusing because the interest rates on these long dated gilts are normally higher than short term interest rates and at the moment the bank rate is half of one per cent whilst the yield on 15 year gilts is around 4.3%.