Sometimes the world of pensions can seem confusing and complex, so we always like to see someone make things simple. An article on the Which? website caught our eye as it does a brilliant job of explaining some of the factors that determine how annuity rates are calculated.
The annuity rate you are offered has a huge effect on how much guaranteed retirement income you can generate from your pension pot. For example, a rate of 5% for a pension fund level of £100,000 would pay you £5,000 per year. Just half a percent increase would put another £500 in your pocket, every year for the rest of your life.
The Which? article lists four factors that influence the rate, and one that doesn’t:
1. Life expectancy
The longer you’re expected to live, the lower your annuity rate (because providers anticipate having to pay you for longer). Your age is obviously a big factor here but so too is where you live, as different regions have different average life expectancy rates.
2. Your health
This also affects life expectancy. If you are in poor health, smoke or have other lifestyle factors, annuity providers expect you to live for a shorter time. That means they will give you a better annuity rate.
3. Interest rates
Lower interest rates mean lower annuity rates, although this isn’t the only financial factor that affects rates.
4. Gilt yields
Gilts (government bonds) are bought and used by insurers as one of the ways they fund annuities. The government pays insurers a fixed amount of interest on gilts, and that will therefore affect annuity rates.
5. NOT your gender
The EU ruled in December 2012 that insurers were no longer allowed to rate annuities based on gender. Women no longer get worse rates because they have longer life expectancies.
As well as the factors listed by Which? Money, the income your pension pot can generate through an annuity depends on which annuity provider you choose. The rate will vary from provider to provider, so it’s important to shop around all of the market.
Retirement Line does this for you, offering impartial guidance and quotes from across the annuity market. As the UK’s largest specialist annuity intermediary*, we also have access to preferential annuity rates due to the volume of plans we arrange.
Retirement Line’s Annuity Specialists are here to find you the best available Annuity Rate based on your personal circumstances and our access to the UK’s annuity providers. Please contact us on 0800 652 1316 or firstname.lastname@example.org for a no-obligation quote to find out what level of retirement income you could achieve.
* Equifax Touchstone annuity sales figures Q1 & Q2 2018