5 factors that affect annuity rates

Are you trying to understand what factors affect the annuity rate you can expect to receive? We have listed 5 factors that can affect what annuity rate a provider is likely to offer you.

1. Postcode. We all know that your postcode can affect the cost of your car insurance, but where you live can also affect your annuity rate and retirement income.  Annuity providers offer better rates to those living in areas that have a higher mortality rate.

Eg. In September 2011, a case study revealed that a £200,000 pension pot in Knightsbridge, London would yield a fixed retirement income of £12,053 a year, whereas, in Glasgow, an area with the highest mortality rate in the UK, that same pension pot would have yielded £13,104.

2. Your savings. It seems obvious, but the more you have in your pension pot, the more retirement income you will receive.  You should still make sure though, that even with a large pension pot, you maximise the annuity rate that you can get.

3. Your health. In the same way they use your postcode, if you are in poor health, you may also be entitled to a higher income.  People in poor health are more likely to die early and therefore offer a better risk for providers.  Read our guide on enhanced annuity rates for more details.

4. Government GILT’s. The reason for the low annuity rates currently found on the market has had a lot to do with the fall in Government bonds and gilts which insurance companies buy to fund annuities.  As returns have fallen from this type of investment, so have annuity rates.

5. Rates offered by different providers. Before committing to the purchase of an annuity, you should ensure you have done your market research. Use an annuity comparison service to compare annuity rates amongst providers and make sure that you get the best value for your money.

Summary

Although there is very little that can be done to control 4 out of 5 of these factors, it is worth bearing them in mind when you approach retirement.  Especially if you have a relatively small pension pot and need to maximise your retirement income to avoid it being eroded by inflation and rising costs.

If in any doubt, always contact an annuity specialist or IFA to discuss your options.