An annuity offers you a fixed income for life or a set period. The annuity rate determines the amount of retirement income you will get in return for your pension savings.
The figure is usually shown as how much you’ll receive each year per £100,000 paid in.
So, if the annuity rate is 5%, you'll get £5,000 for every £100,000 invested.
What is an annuity?
Essentially, an annuity is designed to provide you with a regular income in retirement.
You can use all or part of your pension pot to buy an annuity, which can either pay you an income for life or a pre-agreed number of years.
A key advantage of an annuity is that the terms chosen at the outset are guaranteed. The income you then receive is taxed as earnings.
Are there different types of annuities?
Yes, there are. The type that best suits you will depend on many factors, including your other retirement income, your health, and your appetite for risk.
Here are some of the key types:
Lifetime annuity: This option pays you for the rest of your life and is ideal if you want to avoid investment risk. You can buy an annuity that increases each year to protect you from inflation.
Fixed-term annuity: Here, you get a guaranteed income for a set period, between one and 40 years, but typically between five and 10 years. At the end of your term, you will usually get a ‘maturity amount’, which you can invest how you choose.
Enhanced annuity: If you’ve been diagnosed with an illness that may limit your life expectancy, such as cancer, a stroke or a heart attack, you may aim for a higher retirement income. You will need to answer medical questions before being offered an enhanced annuity rate, and providers may wish to speak to your doctor or organise a medical examination.
Investment-linked annuity: Part of this annuity is guaranteed, but part is linked to investment performance. You choose the guaranteed level of income you want. The invested balance pays extra income based on investment performance, but there is a higher level of risk involved, as this is affected by market rises and falls, so you could end up with only the guaranteed amount.
Purchased life annuity: You can buy this type with money that’s not from your pension pot, or with the tax-free lump sum you receive when you start taking your pension. You only pay tax on the interest part of the annuity income.
How are annuity rates calculated?
Annuity rates are calculated using four essential elements:
Life expectancy: Because annuities guarantee income for life, rates are based on life expectancy. The longer you’re expected to live, the lower your rate as the provider will be paying you for longer.
Your health: Linked to life expectancy, poor health, smoking and other lifestyle related conditions will mean you get a better annuity rate as your life expectancy is shorter. Enhanced annuities, the kind you will be eligible for, can secure you up to 30% more income.
Interest rates: When interest rates are low, so are annuity rates, but if interest rates rise, annuity rates follow as pensions are partly funded by interest earned from investments.
Gilt yields: Annuities are partly funded by government bonds or gilts. Changes in the value of gilts, which providers buy, will affect annuity rates
Which UK providers are offering the best annuity rates?
Here is a comparison of annuity rates from the current top five providers. All figures are correct as of April 2024.
The calculations are based on how much a healthy 65-year-old with £100,000 could expect to receive as a yearly income from a single-life annuity, a joint-life annuity and a joint-life annuity with a 3% yearly rise.
The figures should only be used as a guide.
Single life annuities
| Provider | Annual income |
|---|---|
| Scottish Widows | £6,751 |
| Standard Life | £6,529 |
| Legal & General | £6,481 |
| Just | £6,456 |
| Canada Life | £6,271 |
Joint-life annuities
| Provider | Annual income (50% share) |
|---|---|
| Scottish Widows | £6,356 |
| Standard Life | £6,152 |
| Legal & General | £6,108 |
| Canada Life | £6,002 |
| Just | £5,961 |
Joint-life annuity plus 3% yearly rise
| Provider | Annual income |
|---|---|
| Scottish Widows | £4,492 |
| Standard Life | £4,337 |
| Just | £4,220 |
| Aviva | £4,157 |
| Canada Life | £4,137 |
These rates have been calculated using the Money Helper annuity calculator.
To find out how much you could receive as an annuity, you will need to enter your details into the calculator.
Income is very much influenced by your life choices, individual circ*mstances, health, and prevailing market conditions when you apply.
Because there are so many unique variables that affect annuity rates, it’s a good idea to talk with a professional pensions adviser before making any commitments.
They will be able to help you navigate the intricacies of annuities and maximise your retirement income.
Should you always go for the highest annuity rate?
It depends on what you want from your annuity.
As you explore annuity rates, you’ll find that the highest rates tend to be offered with the most basic annuities.
Once you start adding useful extras, such as securing income for a partner or making sure your payments keep pace with inflation, the rates get lower as your provider will most likely have to pay out more over the term of your annuity.
As with every aspect of annuities, it’s a very personal decision based on your long-term priorities.
If you're looking for help deciding on your retirement income, a financial adviser can offer support.
Unbiased can quickly connect you to a financial adviser regulated by the Financial Conduct Authority (FCA).
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