Annuities are a type of retirement income product that provide a guaranteed income for life or a fixed period of time. Annuity rates determine how much income you will receive from your annuity in exchange for your pension savings. But how are annuity rates calculated and what factors affect them? Here are some of the main aspects that influence annuity rates.
- Interest rates: Annuity rates are closely linked to the interest rates on government bonds, also known as gilts. This is because annuity providers invest your money in these low-risk assets to generate income. When gilt yields are high, annuity rates tend to be high as well, and vice versa. Gilt yields have been low for a long time due to the low interest rate environment, which has resulted in lower annuity rates. However, gilt yields have risen slightly in recent months, which has improved annuity rates.
- Life expectancy: Annuity rates also depend on how long you are expected to live. The longer your life expectancy, the lower your annuity rate, because the annuity provider will have to pay you for longer. Conversely, the shorter your life expectancy, the higher your annuity rate, because the annuity provider will pay you for a shorter period of time. This is why annuity rates vary by age, gender, health and lifestyle. For example, a 60-year-old will generally receive a lower annuity rate than a 70-year-old, and a smoker will receive a higher annuity rate than a non-smoker.
- Annuity options: Annuity rates also vary depending on the type and features of the annuity you choose. For example, a level annuity, which pays a fixed amount of income for life, will have a higher annuity rate than an escalating annuity, which increases your income each year to protect you from inflation. Similarly, a single life annuity, which pays income only to you, will have a higher annuity rate than a joint life annuity, which pays income to you and your spouse or partner after you die. Other options that can affect your annuity rate include adding a guarantee period, which ensures that your income is paid for a minimum number of years even if you die earlier, or a value protection, which returns the balance of your pension fund to your beneficiaries if you die before receiving it all.
As you can see, annuity rates are influenced by a number of factors, some of which are beyond your control, such as interest rates and life expectancy, and some of which are within your control, such as your health and lifestyle and your annuity options. Therefore, it is important to shop around and compare annuity rates from different providers, as well as consider your personal circumstances and preferences, before you buy an annuity. You can use online tools, such as the Money Helper annuity calculator, to get an idea of the annuity rates available in the market. You can also seek financial advice from a qualified professional, who can help you find the best annuity for your needs.