Annuity rates are calculated by actuaries, taking into consideration the life expectancy of the annuitant and the guaranteed income that can be obtained by investing in low risk securities such as government bonds, known in the UK as gilts. Until the mid 1990s the life expectancy calculations took into account all states of health and smoker status, as the "annuity pool" included people in various states of health, as well as smokers and non-smokers.

Click here for examples of current standard annuity rates

Enhanced Annuity Rates

In more recent years many providers have started to offer Enhanced Annuity rates and Impaired Life Annuity rates for people who have a shorter life expectancy because of ill health or lifestyle, and Smoker Annuity rates for those who smoke regularly.

Whilst this is good news for people who fall into one of these categories, as they are now able to obtain a significantly better income to enjoy during their shorter lifespan, it also means that the people who are in good health and do not smoke are likely to receive lower rates than would otherwise be the case, because the lives in poorer health have been removed from the general "annuity pool".

Interest Rates

Another factor to consider is the correlation between gilt yields, interest rates and stockmarket performance. History tells us that when interest rates are high stockmarket returns tend to be lower, whilst possibly improving gilt yields. Conversely when interest rates are lower the stockmarket is inclined to perform better. This means that although your fund may have grown more during a period of low interest rates, the annuity return it will provide may be less because interest rates are low. Had the investment returns been less due to higher interest rates adversely affecting stockmarket returns, then your smaller fund may still have bought the same level of income due to higher annuity rates in those market conditions.

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