Pension Annuity Rates: How Do They Work

However, since annuity income is typically fixed at the outset, securing a competitive annuity rate is critical to sustaining your desired standard of living over the long term, particularly in the context of inflation, longevity, and currency considerations for those living overseas.

This article will explain how pension annuity rates are determined and outline practical steps you can take to improve the rate available to you. It will also highlight key considerations for UK expats thinking of annuitising their pension pot, including how annuities can fit within a broader retirement income strategy alongside other sources of income.

How Do Pension Annuity Rates Work?

A pension annuity rate is the conversion factor used to calculate how much annual income you receive in exchange for your pension pot. It is often expressed as a percentage of the fund value. For instance, an annuity rate of 5% would provide £5,000 annually from a £100,000 pension pot.

In most cases, once your annuity is defined and set, the basis on which your income is calculated is typically fixed at the outset. This feature can provide a high degree of certainty over future payments, either for life (a lifetime annuity) or for a specified period (a fixed-term annuity).

That said, different types of annuities provide varying patterns of income, as outlined in the table below:

Inflation-linked or escalating annuities typically start with a lower initial income, which gradually increases as the term progresses to help protect spending power over time.

Conversely, a level annuity will commence with a higher payment, which remains consistent and does not account for inflation or other external economic factors.

It is crucial to treat an annuity purchase as a long-term commitment. In most cases, an annuity purchase is irreversible. Once set up, it usually cannot be changed, sold, or transferred, and the original lump sum used to purchase the annuity is not recoverable.

While limited secondary markets have existed for certain legacy annuities, these are niche, restricted, and not available for most modern pension annuities..

How Do Annuity Rates Affect Your Retirement Income in Practice?

Annuity rates can significantly impact financial security in retirement, as the rate you secure at the point of purchase largely determines the level of income you will receive going forward. Even modest rate movements can therefore translate into meaningful differences in lifetime income, particularly when income is expected to be paid over many years.

For instance, assume an individual uses a £150,000 pension pot to purchase a level lifetime annuity. If the annuity rate available at the time of purchase is:

• 5.2%: The gross annual income would equal £7,800 (£150,000 × 0.052)
• 5.8%: The gross annual income would equal £8,700 (£150,000 × 0.058)

Consequently, only a 0.6 percentage-point difference results in a £900 difference in income per year. Over the course of a 20-year retirement period, this amounts to £18,000 of additional gross income, before tax and without allowing for inflation or changes in purchasing power.

Annuities vs Pension Drawdown

When approaching retirement, many UK expats face a key decision around how to convert their pension savings into sustainable income, particularly where retirement may span several decades and involve cross-border considerations.

In practice, this is rarely a binary choice between annuities and pension drawdown. Instead, it involves determining how different income sources can work together to meet long-term needs, balancing certainty, flexibility, and risk.

Pension drawdown allows funds to remain invested while providing flexible access to income. This flexibility can be attractive, particularly for expats who value adaptability in response to changing tax rules, residency, or expenditure patterns. Income levels are not guaranteed and remain dependent on investment performance and withdrawal rates.

Drawdown also exposes retirees to market volatility, sequencing risk, and the possibility of depleting pension assets earlier than expected, especially during periods of sustained market weakness or elevated withdrawals early in retirement.

Annuities, by contrast, exchange flexibility for certainty. By converting part of a pension pot into a guaranteed income, an annuity removes longevity risk and reduces reliance on future investment performance, although this comes at the cost of reduced access to capital once the annuity is purchased.

As a result, annuities are often used to secure essential or non-discretionary expenditure, while remaining pension assets are kept in drawdown to fund variable spending or provide longer-term growth potential, creating a blended approach that can improve overall retirement income resilience.income resilience.

Which Factors Impact Annuity Rates?

Your annuity rate depends on several factors, most importantly:

1. Age and health
2. Interest rates and gilt yields
3. Inflation and other socioeconomic factors
4. Annuity product features

Age and Health

Annuity rates generally increase proportionately with age because the insurer expects to make payments for a shorter period.

Health and lifestyle choices can also substantially improve the annuity rate available to you. If an insurer assesses that your life expectancy may be shorter than average, you may qualify for an enhanced (also referred to as an “impaired life”) annuity, which typically pays a higher income. Factors the insurer will commonly consider include:

• Pre-existing medical conditions (e.g., diabetes or high blood pressure)
• Higher body weight
• Smoking

It is crucial to accurately disclose your health and lifestyle information to the insurer to ensure the quoted rate reflects your personal circumstances.

Your location may also be relevant in certain cases. Some providers have historically used postcode-based factors as part of their underwriting process, treating location as a broad proxy for longevity. The relevance and weight of such factors vary by provider and over time.

Longevity Risk and Why It Matters

One of the central challenges in retirement planning is longevity risk, defined as the risk of living longer than anticipated and outlasting other sources of income.

Improvements in healthcare and living standards mean that many retirees will spend two to three decades or more in retirement, increasing the importance of reliable long-term income.

Annuities are specifically designed to address longevity risk by pooling life expectancy across policyholders. This allows insurers to provide income for life, regardless of how long an individual lives.

For UK expats, this feature can be particularly valuable, as retirement planning may be complicated by investment uncertainty, currency movements, and differing access to state benefits depending on country of residence.

Interest Rates and Gilt Yields

The prevailing interest rate environment is a major external driver of annuity rates. UK insurers typically back annuity liabilities with long-term, cash-flow-generating assets, such as government bonds (gilts) and high-quality corporate bonds. Consequently, the yields available in these markets help shape the annuity rates that insurers can sustainably offer.

Recent market conditions illustrate this connection. For example, during late 2023, UK interest rates reached their highest level in approximately 15 years, and long-dated gilt yields increased to around 5%, which materially improved annuity pricing at that time.

A similar dynamic has been observed in the US. The post-2022 rise in interest rates and Treasury yields improved the economics of many annuity products and supported stronger annuity pricing and sales.

While a certain degree of familiarity with bond markets may be beneficial in interpreting annuity rate movements, attempting to ‘time’ annuity purchase decisions with precision is difficult in practice and does not reliably lead to better outcomes. In addition, rates vary between providers and product designs, so it is generally prudent to compare multiple quotes before committing.

You may also consider seeking regulated financial advice before making an annuity purchase. If you are living overseas, it is important to ensure that any adviser is appropriately authorised to advise you based on both your country of residence and the jurisdiction in which your pension is held.

Our experts at Titan Wealth International can assist you in assessing suitability, comparing options, and integrating an annuity into a broader retirement plan.

Inflation and Other Socioeconomic Factors

Inflation and broader economic conditions can affect annuity rates even if you do not select an escalating or inflation-linked product. Policy-makers typically respond to elevated inflation by raising interest rates, which in turn leads to higher bond yields.

Because insurers commonly back their liabilities with long-term government and corporate bonds, higher yields can improve the rates they are able to offer for new annuities.

However, risk events such as recession fears, geopolitical tensions, or market volatility do not automatically lead to increased bond yields.

In periods of heightened uncertainty, investors often turn to government bonds as safe-haven assets, which can push bond prices up and yields down. In such circumstances, annuity rates may come under pressure rather than rise, although outcomes depend on the specific shock and the central banks’ response.

Expectations of future inflation may also directly influence your selection of annuities. If you are concerned about inflation eroding purchasing power, you may consider an escalating or inflation-linked annuity.

Annuity Product Features

Annuities can be tailored through a range of options that determine how (and to whom) income is paid. These features typically involve trade-offs and will often reduce the starting income because they increase the likelihood or duration of payments.

Key features include:

• Joint-life options: A joint-life annuity continues providing payments to your spouse or dependant upon your death, typically as a proportion of the original income. As the insurer may be required to make payments for a longer period, they will typically offer lower annuity rates.
• Guarantee periods and death benefits: An annuity may include a guarantee period that ensures income continues to be paid to your beneficiaries after your passing. Such additions generally reduce the annuity rate due to the increased likelihood of additional payments.
• Fixed-term options: Rather than securing income for life, you may select a product that offers guaranteed income for a defined period. A shorter term may result in a higher annuity rate because the insurer’s obligation is limited.

In certain situations, it may be sensible to accept a lower rate in exchange for an annuity feature that better supports your retirement objectives.

For instance, adding a guarantee period or beneficiary protection may mitigate the fact that many annuities provide limited or no residual value on death unless such an option is selected at the outset.

Can You Time Annuity Purchases?

In principle, delaying an annuity purchase can increase the offered income, as older applicants generally receive higher rates.

However, available rates also depend on prevailing market conditions at the time of purchase, including interest rates and bond yields, so postponement does not guarantee a better outcome.

Equally, delaying a purchase can carry an opportunity cost: you may sacrifice years of secure income and remain exposed to investment and sequencing risk in the meantime, which can be particularly relevant during periods of market volatility or when approaching the early years of retirement.

One approach to mitigating the timing risk is phased (or staggered) annuitisation, which involves two actions:

1. Purchasing an annuity with a portion of your pension pot at the current rate.
2. Keeping the remainder invested (or in drawdown) and annuitising later, if and when doing so becomes appropriate.

Considering the uncertainty of future market movements, it is virtually impossible to predict the exact point at which you can achieve the highest annuity rate.

However, seeking professional guidance can help you make an informed decision about how and when to secure guaranteed income in the context of your wider retirement strategy, rather than attempting to time the market precisely.

Key Considerations for UK Expats

While the underlying mechanics of annuity pricing are broadly the same regardless of residence, the practical availability of providers, tax treatment, payment logistics, and regulatory constraints can differ significantly for UK expats compared with UK residents.

As a result, your ability to access the annuity market and the net income you receive after tax and currency effects may differ in practice.

Key considerations for UK expats include:

• Provider availability and cross-border constraints: Some insurers and pension providers may be unwilling or unable to offer retirement-income products in your country of residence due to local regulatory requirements. In practice, this can result in fewer providers to obtain quotes from, which may indirectly affect the annuity rate available to you.
• Tax treatment can differ from nominal income: UK annuity income is generally treated as UK-source pension income, and providers will typically deduct UK tax under PAYE unless HMRC issues a “no tax” (NT) code under the relevant double tax agreement. If you are non-UK resident, your country of residence may also seek to tax the same income, depending on the applicable treaty provisions. The ultimate tax outcome depends on the specific double tax agreement (DTA) between the UK and your country of residence, and professional tax advice is strongly recommended.
• Currency and payment constraints: Even with the same annuity rate, the income you can spend locally may vary due to foreign exchange movements, and some arrangements may incur additional charges depending on how and where payments are made.

How Annuities Fit With the UK State Pension

When planning retirement income, annuities should be considered alongside the UK State Pension. For many retirees, the State Pension provides a baseline level of guaranteed income, which may influence the amount of additional secure income required from an annuity.

For UK expats, the treatment of the State Pension can vary depending on country of residence. In some jurisdictions, payments continue to increase annually in line with uprating policy, while in others the pension may be frozen at the level first received.

Understanding how the State Pension will evolve over time can help determine whether a level or escalating annuity is more appropriate and how much income needs to be secured from private pension savings.

Currency Risk and Annuity Income

For UK expats, currency risk is an important consideration when assessing annuity income. Most UK pension annuities pay income in sterling, meaning the spending power of that income overseas will fluctuate in line with exchange-rate movements.

A weakening pound can increase the value of sterling income when converted into local currency, while a strengthening pound can reduce it. Because annuity payments are typically fixed in nominal terms, sustained adverse currency movements may materially affect long-term affordability.

Some retirees seek to manage this risk by aligning sterling-denominated annuity income with sterling-based expenditure, such as UK property costs or travel, while using drawdown or other assets to fund local-currency spending. Others adopt a phased annuitisation approach to retain flexibility in how and when income is secured.