The annuity rate being offered by a life company to
an individual at any particular time, will vary according to the
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
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.
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.