Updated: June 21, 2019

Annuity Returns

How to work out the rate of return for an annuity

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Tony Stevens

Author: Tony Stevens - Finance Expert

Updated: June 21, 2019

Return on annuities depends on various factors, not least on stock market conditions and on your age and health, among other variables. Clients often ask us whether annuities are worth their rate of return. That’s the subject of this article, which discusses the following topics:

In all cases, you’d be advised to make an enquiry for expert advice.

Indeed, the government urges pension holders to seek qualified guidance before buying an annuity.

How are the rates of return on annuities set?

Annuities offer various percentage rates that range anywhere from 2–8.5% (at the time of writing), depending on market conditions and on the particular provider. For example, if you retire with a pot worth £100,000 and you buy an annuity of 5%, you can expect to receive £5,000 a year. You receive lower annual rates with certain annuity products than others.

As with your regular pension drawdown option, you’re given 25% of your pension savings. See this guide on pension drawdown tax for details.

It’s highly recommended that you speak to an expert who can compare rates across the market since these differ from one provider to another. Some years also yield more attractive rates than others. During poorer years, you may want to retain your drawdown benefits. See this Guide on Pension Drawdown vs. an annuity for details.

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How much return can I expect on my annuity?

First, you may only benefit if you have a defined contribution pension rather than a defined benefit pension that gives you the same benefits as an annuity, without its expenses. If you have a defined contribution benefit, your return largely depends on economic conditions. With high interest rates and a thriving economy, you’re likely to be offered a higher rate when you purchase an annuity.

Another contributing factor is the performance of government gilts (or bonds). To protect their money, providers invest predominantly in gilts, typically 15-year bonds with interest. When gilt yields plummet, annuity rates of return plummet, too.

Annuity returns depend on certain conditions

Market conditions and gilts aside, the return you get depends on factors that include the following:

  • Your age
  • Your location
  • Your medical history
  • Your gender
  • Your provider

The amount of return you get also depends on these factors:

  • The type of annuity you’ve chosen,e.g. a single or joint life annuity
  • Your riders, or provisions, like “value protection”, where beneficiaries get your remaining money following your death.
  • The rate of the annuity when you bought it (called the “purchase price”).

Finally, fees vary and fluctuate constantly, so you should speak with an expert to find the best deal. Call us on 0808 189 0463 or make an enquiry and we’ll put you in touch with experts who have whole-of-market access, meaning that they can often find great deals that aren’t available to the public.

Annuity returns depend on annuity type

Generally, the factors that increase the rate you will be offered on your annuity are advanced age and health factors. This is because your provider considers you may have less time to enjoy your income. Consequently, annuity products that are geared towards these needs give you a higher rate of return.

Three factors that could increase your annual rate

You may receive higher income rates for the following:

  • Age. The older you are, the more income you’ll receive.
  • Enhanced annuity option given for medical/ lifestyle conditions and/ or expected shortened life expectancy. For example, multiple heart attacks could get you 31% more income, type 2 diabetes 30% more and asthma 21% more. Heavy smoking could boost your income to 40%, while being obese could hoist it to 15%.
  • Immediate needs annuity – Also known as an “immediate care plan” or an “immediate need care-free payment plan”, this annuity option is your pension converted into an immediate tax-free lump sum for the care of a relation at home or for their medical/long-term care elsewhere (like in a care home or hospice).

Six factors that could decrease your annual rate

On the other hand, you may receive lower annuity returns (a lower starting income) with premium products that include the following:

  • Joint life or survivor annuity. This is when your partner, or another nominated beneficiary, receives an income after your death.
  • Guaranteed annuity. This annuity is if you want your income to pay out for a guaranteed period.
  • Escalating or index-linked annuity. Your annual income rises in line with inflation. Insurance providers use either the retail prices index (RPI) or a fixed rate (e.g. 5.0% a year) to adjust your payouts.
  • Investment backed annuities. Your annuities remain invested with the potential of higher returns, although there are risks of losing out, too
  • Capital protection. Otherwise called ‘annuity’ or ‘value’ protection, beneficiaries of the policy owner inherit the policy holder’s unused pot.

You might get these lower rates because you’re paying for added benefits.

What is a guaranteed annuity rate (GAR)?

Some providers offer you a guaranteed annuity rate (GAR). These are fixed rates of interest (10%+) that hold at all times, regardless of market fluctuations. These GARs also double modern interest rates. At the time of writing, a £100,000 pension with the locked-in GAR could buy a 65-year-old around £5,400 of income a year for life.

GARs, however, have their terms and conditions that you’ll want to check to see if they suit your situation. These include the following:

  • When can you withdraw the pension?
    Most of these GARs were created in the 1980s and early 1990s, with a late retirement date.
  • If you’d like your family, or others, to receive your funds upon your death.
  • Does your GAR give you the spending power to keep up with the cost of living?

Uncertain whether or not you want to retain that GAR? It’s always a good idea to make an enquiry so we can connect you with an informed expert.

Questions to help you assess your annuity rate of return

Market conditions aside, certain pension owners may profit more by retaining their drawdown option. Here’s six questions to help you decide:

  • Existing debts? If you have debts, debtors can lay claim to part or all of your annuity.
  • Do you have a final salary agreement? If that’s your pension type, you may be entitled to higher benefits than those any annuity option offers.
  • Do you anticipate income changes that may decrease your spending power? You could opt for the inflation-linked option, although always check with an expert to establish whether other options are available

In short, various factors that include age, lifestyle, health, the size of your pension, your goals, and where you live determines the rate of your return, or whether it would be a good option for you to buy an annuity. Your best bet? Make an enquiry to be referred to  trusted experts who can help.

Speak to an annuity returns advisor

Unsure and looking for more information on the rate of return of your annuities?

Call us today on 0808 189 0463 or make an enquiry here.

Then sit back and allow us the hard work in finding the right pensions advisor for your situation. We don’t charge a fee and there are no obligations.

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We can help! We know everyone's circumstances are different, that's why we work with brokers who are experts in pensions Ask us a question and we'll get the best expert to help.

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Tony Stevens

Tony Stevens

Finance Expert

About the author

Tony has worked in a vastly diverse array of areas in the pensions industry for over 20 years. Tony regularly writes for trade press, usually on topical and pensions pieces as well as acting as a judge at prestigious national events.

Tony is also a highly qualified Independent Financial Adviser in his own right. His mantra has always been “Hope for the best, but plan for the worst”, and believes that the biggest impact that an adviser can have on a client’s life journey is to take them on a journey from generally having little or no real idea of what their retirement will look like, to giving them the understanding of what their retirement looks like now, then helping them navigate a path to what they want their retirement to be.

FCA Disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms that are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

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