Annuities are insurance that give pension-holders the opportunity (if desired) to take some or all of their pension pot and exchange it for a new policy that pays them a certain income on a regular basis throughout their retirement. Actual rates vary from one provider to the next, meaning that annuity values and value for money in general also differ greatly.

As an annuity pays regular income for the rest of the person’s life, those in good health with long life expectancies will naturally be paid at a lower rate than those with severe health problems. In essence, those offering these kinds of policies are hedging their bets in accordance with how long the policy holder will live, in order to ensure the deal finishes out with them in profit, rather than in the red.

Previously, those with define contribution pensions had no real choice other than to buy annuities. This year’s pension reforms however have brought new options to the table, though for some the annuity still makes the most sense of all.


It’s impossible to go back and change things once an annuity has been bought and set in motion, which is why it’s crucial to make the right choice in the first place. One of the reforms brought in as of April this year made it possible for those with annuities to access their funds to withdraw as much as they like at any time over the age of 55, which would then be taxed at the same rate as normal income.

Various factors should be taken into account when considering which annuity to go with and pension options in general, including:

  • If you require protection from inflation
  • What risk level you’re happy to accept
  • If you have any dependents who rely on your income
  • Whether you’d prefer there to be some flexibility
  • The level of control over your investments you require
  • Fees and charges payable
  • Any inheritance considerations should you wish to pass assets on
  • What kind of health you are in and your lifestyle

Once again, it’s important to bear in mind that the decision you make with regard to the annuity you choose is irreversible – something that may or may not change next year. As such, it’s crucial to speak to an independent financial adviser in order to fully understand your options and situation.

Annuity rates

The rare of the annuity will determine how much you can expect to be paid on an annual basis in exchange for the pension savings you swap. More often than not, it’s a case of being shown how much you’ll be paid per £10,000, so if the rate of the annuity was £500, you’d get £500 per year for every £10,000 you paid in.

What Influences Annuity Rates Generally?

1. Life expectancy

An annuity is in essence a type of insurance policy – the funds are pooled together and paid out gradually for the rest of the policy-holder’s life. If you live a shorter life, you’ll be paid a larger annual amount – if on the other hand you’re likely to live much longer, payments are reduced to extend over the years required.

2. Your health

Health of course links in with life expectancy, which means that if for example you have any underlying health conditions, you’re a smoker or have a family history of certain diseases, your annual payments may be higher.

3. Interest rates

Interest rates affect annuity rates directly – lower interest rates meaning lower annuity rates. With the existing 0.5% base rates, annuity rates took a real dive and remain relatively low.

4. Gilt yields

Government bonds – aka gilts – also provide partial funding for annuities. These are bought by insurers who then receive a set amount of interest in accordance with inflation and the base rate. Once again therefore, when base rates fall, the tendency is for annuity rates to do exactly the same.

Buying an Annuity

To purchase an annuity is to essentially convert your pension pot into a staggered stream of annual income that’s paid out gradually for the rest of your life. You now have the option of taking as much of your pension as you like out at any one time, but in doing so you will be taxed at the standard applicable income tax rate.

There are quite literally limitless options when it comes to the types of annuities on the market, which is why it’s important to seek professional guidance. The process of organising an annuity can also be very complicated – again, a good reason to seek advice. Rates vary enormously, so shopping around is key when it comes to finding the very best deal for you.

After determining how much income you will require annually, comparing rates – aka using the Open Market Option – is critical. Research suggests that by shopping around as opposed to diving into the first deal that comes along, income following retirement could be increased by as much as 30% – it’s an investment in time that’s very much worth making.

According to industry estimate, hundreds of millions of pounds are needlessly thrown away every year by those who simply do not bother searching for the very best deal before signing up to an annuity.