Many people argue that Annuity rates are determined largely by the yield on government’s bonds known as yilds. Annuity providers (typically insurance companies) typically finance pensions by buying up government yilds.

Therefore, if the yield on these government bonds fall, annuity providers usually have to reduce annuity rates. If the yields rise, they usually increase rates. 

Your annuity providers usually invest in low risk government stock, which is linked very closely to the base interest rate. When the Bank of England base interest rate move up, annuity rates are also typically climb. 

However at the moment with interest rates still very low following the recession, annuity rates for people retiring now are much lower than they were a few years ago. This is because the return on investment on government stock (closely tied to interest rates as mentioned) is currently fairly weak. As interest rates begin to eventually rise over the coming years, pensioners will be hoping annuity rates move up too.

While many people argue that Annuity rates are heavily influenced by the yields on government bonds, other factors are increasingly being taken into consideration such as the fact that people are living longer.

Other important factors in determining rates include your gender, health, and your age. Like other products, insurance companies look to determine your risk profile. Women have higher life expectancies than men so they therefore typically have lower annuity rates. 

Another factor that people often do not know about is the influence had by postcodes (see chart). Where you live has an effect on the income you get from your annuity. As the chart from Burrows & Cummins below shows, someone living in Glasgow would get a higher annual income than someone living in Chelsea even if they had the same pension pot.

Total Income Over 20 Years From a £100,000 Level Annuity.

Source: Burrows & Cummins