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Annuity RatesThe annuity rate being offered by a life company to an individual at any particular time, will vary according to the following factors:

1. Medium to long term interest rates levels

This is the most important factor which influences the annuity rates life offices offer at any time. Life companies tend to match their liability to payout a pension by investing in a Treasury Bond of a term roughly equivalent to the life expectancy of the individual buying the annuity.

However some life companies now also take account of interest rates ruling on 'commercial' fixed interest securities, e.g. debenture loan stock issued by quoted companies. As interest rates increase so do annuity rates offered, and vice versa.

2. The age and sex of an individual

The older the person is, the higher the annuity rate offered, as the life office will estimate that the life expectancy is lower, i.e. that it will have to payout the pension for a shorter period than it would for a younger person. If the individual lives shorter than this assumed expectation, then the life company will benefit by retaining whatever balance of capital is left with it. On the other hand, if the individual lives longer than this assumed expectation, then the life company will lose, as it will have to continue paying out long after the capital sum is fully paid out. Indeed with improving mortality trends, i.e. pensioners are living longer, many life companies are losing money on annuities sold many years ago, when they took a more pessimistic view of future mortality trends.

3. The type of annuity

An annuity can be either:
  • level or escalating.
  • with a minimum guarantee period or no guarantee period, i.e. an initial period for which the annuity is guaranteed to be continued to be paid even if the individual dies. The maximum guaranteed period allowed under a pension annuity is 10 years.
  • single or joint life, i.e. where on the death of the life, part or all of the pension may continue to be paid to the individual's spouse or other dependant.
  • frequency of payment, e.g. whether the pension will be paid monthly in advance or annually.
Annuity Rates 4. The health status of the individual

Traditionally life companies have offered the same annuity terms to all retiring policyholders, regardless of the state of their health. Annuity rates have traditionally been based on the average life expectancy for individuals of that age.

However some life companies will now offer better annuity rates to individuals retiring , who have a lower than normal expectation of life. The better annuity rate reflects the fact that the life office calculates that it will pay the annuity for a shorter period than for a person of a similar age, who has a normal expectation of life.

These enhances annuity rates are referred to as impaired lives annuities, but not all life companies offer such annuity rates.