Annuity Rates Outlook
We follow the progress of our benchmark annuity rate for a person aged 65 with a fund for £100,000 buying an annuity on a single life, level basis. The benchmark example uses a central London postal code (other areas in the UK would have incomes up to 5% higher than those shown).
Find out more details:
monthly analysis of annuities and gilt yields
Below shows the annuity rates and gilt yields over the last six years to date:
||Annuity Rates Chart
Read the latest annuity rates review to find out if this is the best time to buy an annuity.
||Annuity Rates Changes
Find out about the latest changes in annuity rates and if they are rising or falling.
||15-Year Gilt Yields
The 15-year gilt yields have a significant effect on annuity rates which we update daily.
You can personalise your annuity by changing or adding features to reflect your own circumstances by adding extra features. This could be to provide a pension income for your spouse, or an escalation element to protect the income against inflation. You can even decide the frequency of payment from monthly to annually, payable in advance or arrears.
The rates you receive from pension annuities are based in part on index-linked gilts that
provide an index-linked income and redemption values in the
future for the providers. In the long term annuity rates are likely to continue to fall due to lower inflation and improved life expectancy. Inflation also has an effect on the value of money and this will erode the buying power of pension annuities over time.
With an open market option it is possible to counteract the effects of inflation by adding an escalation feature that increases the pension income over time. However, this would mean a lower starting income when compared to a standard (conventional) annuity. There are many other features that can be changed on an annuity such as adding a spouse's income or a guaranteed period of payment in the event of an early death of the annuitant. All these extra benefits have a cost that reduce the annuity income from the start.
At retirement the individual can use a money purchase fund, personal or company, to buy an annuity using an open market option to search for the highest pension annuity. Features can be added at this point such as escalation, a spouses's pension or frequency of payment. Once you have purchased an annuity it cannot be changed, so learn more about pension annuities, compare annuity rates and before making a decision at retirement, secure a personalised pension annuities quote for an accurate income for you and offering guaranteed rates.
If you are comparing our free annuity quote to the illustration
you have received from the existing provider, please remember
to make sure the annuity details are exactly the same.
Any difference could mean our quote figures can be improved
when compared like for like with your provider's illustration.
Added feature costs
The annuitant can add extra features to a pension
annuity depending on their requirements. The following
table shows the costs associated with a number of main features,
assuming that the annuitant and spouse are 65 years old, the
income is on a level annuity basis paid monthly in arrears,
no guaranteed period included and is without proportion. The
cost of the added features will reduce £1,000 of pension
income per year by the stated amounts.
|Cost per £1,000 of pension income
|Annuity table - the annuity rate
costs shown above are based on annuitant at the
age of 65 and should be used as a guide only. For
an annuity rate specific to your circumstances you
should complete the free
For example, the cost to a female of adding a guaranteed
period of 5 years will be £6, reducing her income from
£1,000 per year to £994. For a male the cost would
be £8, reducing his income from £1,000 per year
to £992. This difference is due to the fact that male
life expectancy or mortality is shorter than for a female and therefore represents a higher
risk for claiming.
Also, for a female the cost of a 50% survivors pension is
£77, reducing her income to £923 per year whereas
for a male this is £140, reducing his income to £860.
The difference is due to the fact that it is more likely a
female will outlive her spouse and therefore the risk to the
insurance company is higher where the annuitant is the male.
12-month trend 2014
For all annuitants retiring in August 2014 aged between 50 to
75 and purchasing single or joint life level pension annuities, they
have seen a decrease in the income payable when compared to
rates 12 months ago in August 2013.
The following tables show the latest conventional rates compared to last
year (follow the link for smoker rates showing a 12-month trend). It is based on an original pension fund of £133,333
and after the tax free lump sum has been taken, £100,000
is used to purchase an annuity. The difference between the two
years is shown in pounds sterling per annum. The percentage
is the change from the annuity rate paid last year.
|Single Rate Change
||50% Joint Rate Change
|Annuity table - the annuity rate
changes are based on £100,000 in May 2010
compared to May 2011. For annuities specific
to your circumstances you should complete the free
Effect of inflation
The effect of inflation on a level
annuity would be to reduced the buying power of this income
in the future, thereby reducing the standard of living of the
annuitant in today's money so an annuitant should consider protecting
this using pension annuities with RPI
escalation. Current inflation is between 1.5% and 3.0% and even this low
level can significantly reduce the value of the annuity income,
as the following table shows.
|Future buying power of £1,000
For example, for a 65 year old male with a single
life annuity with a level income of £10,000 per
year, a 3.0% rate of inflation will reduced the buying power
of this money to £7,440 per year in real terms by the
time he is 75 years old. If he lives to this age, the mortality statistics expect he can live for another 12 years, to 88
years of age. By then this income is going to be worth only
£5,067 per year in real terms. If inflation rises above
3.0% on average, his income is going to be even lower.
However, the annuitant must remember that annuities with
RPI escalation reduces the initial pension income received,
so for a 65 year old male given 3.0% inflation it would take
almost 11 years before the income matches the level annuity,
or considerably longer, almost 20 years to match the cumulative
By purchasing annuities through an open
market option, the current pension fund provider may make
an administrative charge. However, the extra income secured
far outweighs such costs. The other consideration is what
costs are there from the new provider of the pension annuity.
To a certain extent this is not a consideration because when
an annuity is purchased for the highest possible income, the
capital now belongs to the insurance company. In general,
the insurance company take 4% from the capital and this represents
a charge for administration and to cover the distribution
The distribution cost include such things as advertising,
direct sales force or an intermediary such as an independent
financial adviser (IFA), for selling their products
and this is accounted for in the annuity quotes provided.
Typically this cost is between 1.0% and 1.5% of the purchase
price of the annuity.
Nevertheless, the extra income secured by an open market option,
taking into account of all the cost, can be as high as 30%
compared to the offer made from the existing pension provider.
Many people buying pension annuities direct are paying this charge
on an execution only basis. This means that if it turns out
the annuity is not appropriate, they have no option for complaint
as they have effectively advised themselves.
Specialist advice from an IFA with protection provided by
Services Authority (FSA) should be sought, as this will
be paid for by the insurance company out of their distribution
There is always the concern that the
insurance company which provides the annuitant with a pension
income could become insolvent at some point in the future
and what would happen to the payments. It is therefore very
important that some research is conducted regarding the financial
strength of the provider and this can be offered by an IFA.
However, there is protection provided in legislation, and
in particular the original protection for a policyholder was
introduced in the Policyholder Protection Act 1975 (PPA 75)
where the policyholder protection board (PPB) acts as an industry
funded safety net when a UK insurance company becomes insolvent.
Under the Policyholder
Protection Act 1997 (PPA 97) this protection covers a
purchased life annuity and pension annuity. In the first instance
the PPB must initially seek to transfer the ongoing policies
of the insolvent insurer to another company. The PPB must
ensure the policyholder will receive 90% of the future benefits
from the annuity. The provision of the PPA 1997 has been incorporated
in the FSA, applying from midnight on 30 November 2001 and is called the Financial Services Compensation Scheme (FSCS).
Two thirds of people in the UK are retiring today only to
accept a poor annuity income from their pension provider,
when an open
market option could have increased this income by up to
30%, worth thousands of pounds every year for the rest of
their lives, simply by asking for the best annuity rates.
It may be that other options such as pension drawdown or phased
retirement would be more suitable than an annuity.
It is very important to purchase the right pension income
because once bought pension annuities cannot be switched to another
annuity provider, cannot be changed to a different type of
annuity and cannot be altered in any way for the rest of the
annuitant's life. Therefore if the annuitant could benefit
from an enhanced
annuity or impaired
annuity, this option must be explored before buying the
Specialist advice does not have to cost the annuitant more
money. The distribution costs associated with selling an annuity
by an insurance company cover the cost of advertising or advice
and amount to between 1.0% and 1.5% of the annuity purchase
price. However, individuals that buy direct pay for this cost
yet the pension annuity is sold on an execution only basis, passing
on the risk that the annuity may not be suitable back onto
By receiving specialist advice from an IFA with an annuity
and pension bureau, the annuitant benefits from the consumer
protection provided by the FSA if the advice given was not
appropriate. If you are unsure of the features and options
offered with an annuity, or would like advice on alternatives
to pension annuities such as income drawdown, phased retirement,
With Profits annuities of even temporary pension annuities,
you could benefit from advice specific to your circumstances
and attitude to investment risk.
Current annuity rates are at the lowest levels for the past
40 years. Some people may think that this means annuity rates are more likely to rise in the future. However, the pension
income paid from pension annuity is dependent on a number of economic
factors, and these suggest that annuity rates are likely to
remain where they are today or fall in the future.
The long term rate of inflation in the UK is now under control between
1.5% and 3.0%. This reduces the yields from investments and
gilts which are purchased by the insurance companies to pay
annuity income to annuitants. The UK Government uses the gilt
market to raise money to increase public expenditure. It does
this by offering attractive rates of interest, but currently
this money is not required.
The market expectation is that the UK will eventually joint
the Euro. As the interest rates in Europe are lower than in
the UK, this means that UK interest rates must fall to match
that of Europe. The markets have already reflected this expectation
in interest rates, so when the UK does join the fall in income
to annuitant is not going to be significant.
In the past there was
only a single annuity market where the early death of
an annuitant resulted in a mortality
profit for the other annuity holders. However, these
annuitants are now selecting against the insurance companies
by opting for an enhanced or impaired annuity, phased
retirement or pension
drawdown. This has the effect of reducing the mortality
profit and hence the annuity rates.
About Sharing Pensions
Sharingpensions.co.uk was created by it's founder Colin Thorburn in 2001 to provide a free pensions and annuity resource to hundreds of thousands of people at retirement making their decision making easier and to select the best options.
Colin Thorburn has nineteen years experience in pensions and annuities, is an individual authorised by the Financial Conduct Authority and business is submitted through Blackstone Moregate Ltd which is authorised and regulated by the FCA (no. 459051).