Annuity rates 2022 – how annuity rates are calculated

In this guide: Understand annuity rates and how to find the best annuity rate for your hard-earned pension savings.

What does annuity rate mean?

An annuity uses your pension pot to pay you a regular income for life. The annuity rate is what decides how much income you will get, and it depends on current market rates as well as personal factors such as your age, your health and lifestyle, and your postcode.

How are annuity rates calculated?

A number of factors determine UK annuity rates, including:

1. Current interest rates

Your pension annuity is funded in part by the interest earned on your money while it is invested. The lower the bank base rate (0.50% in February 2022), the lower interest rates and annuity rates are.

2. Gilt yields

Annuities are also partly funded by gilts, which are government bonds. This means that the income paid by an annuity is linked to the yield generated from these gilts. The lower the gilt yield the lower annuity rates and vice versa.

3. Your estimated life expectancy

A pension annuity guarantees you an income for life, however long that may be. So a healthy person in their late 50s is likely to live a long life and need more income than someone who is older, in poor health, or both.  This principle is reflected in the annuity rate you’re offered. In other words, the longer your life expectancy, the lower your annuity rate and vice versa.

4. Your health and lifestyle

If you’re in poor health or a smoker, or you engage in any other lifestyle activity that could potentially shorten your life, you could get an enhanced annuity at a better rate that could amount to as much as 30% more income.

Pension annuity rates – what else can affect them?

Annuity rates can vary widely between providers, and the rate you're offered can be affected by a range of factors. These can include other types of annuity such as:

  • Joint cover for you and your partner
  • An arrangement to ensure your pension income can continue to be paid to your partner or someone else after your death
  • Whether you want your income to remain at the same level throughout your life or would prefer it to rise each year to protect you against inflation.

Because of the different offerings from providers, you may find that some will produce much more income for you than others over the duration of your retirement.

To work out which annuity will be most suitable for your needs and produce the greatest income within your parameters, speak to a pension income specialist such as Age Partnership. They will look at all your circumstances and requirements, both current and future, and then consider the entire market to find the deal that's right for you.

Bear in mind that, like interest rates, annuity rates fluctuate over any given period of time. When you're applying for an annuity, it’s worth getting a new quote at the last minute to ensure you're getting the best rate possible.

 What is a guaranteed annuity rate?

A guaranteed annuity rate (GAR) is a rate set at the outset of your pension plan. This means it is likely to be much higher than the rates offered today.

According to unbiased.co.uk with-profits pensions taken out before 1988 are most likely to have a GAR, so if you have this type of pension, check your policy documentation carefully or ask your provider.

Enhanced annuity rates

Standard annuity rates are based on information such as your age, how much your pension pot is worth, where you live, any tax-free cash already withdrawn from your pension pot and any options you have added to your annuity, such as index linking your income.

As this information is limited, standard annuity rates are not as advantageous as those offered with an enhanced annuity. This is because enhanced annuity rates are based on more personal and detailed information about your lifestyle and health.

As with any insurance, the provider factors in the likelihood of a particular event occurring. If you have health issues or have made lifestyle choices that could shorten the length of your life, your annuity provider will consider you a higher risk and offer you a higher annuity rate, which in turn gives you a higher pension income.

Do smokers get better annuity rates?

Yes, as a smoker you’ll qualify for an enhanced annuity and get a higher annuity rate than a non-smoker with the same size pension pot.

If you have a smoking-related condition such as COPD, your annuity rate could be enhanced further, as your ill health would be considered on top of the enhanced rate you get for being a smoker.

Speak to the annuity and pension income experts

Age Partnership’s annuity calculator is a good starting point for finding out how much more retirement income you could get.

Then why not talk to the team at Age Partnership about annuities? Their experts will answer any questions, search the whole of the market for the best annuity rates and help you make the right decision when the time comes.

Age Partnership are so confident they can find you the best annuity deal that they will even give you £100 if you find a better like-for-like annuity quote.

Try the annuities calculator

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