Factors affecting annuity rates

The biggest factor in dictating annuity rates is interest rates and their impact on Gilt yields. The bedrock of a Life Company’s coffers is ultra-low risk interest-bearing government securities. If yields look good compared to prevailing interest rates, prices go up so companies have to pay more for the Gilts, which lowers the yield. There’s a direct correlation between how Gilts are performing and annuity rates.

Low inflation also squeezes annuity rates, as does increased life expectancy. The economics of the annuity supplier means you can’t have people living longer than a Life Company’s assets take to be depleted. That’s a game nobody wins.

Every ten years, the average life expectancy increases by three years, so actuaries and Life Companies lower rates to ensure they remain solvent. Take those three factors together, and that’s why it’s a relatively tough time for prospective annuitants.