How annuity rates are worked out
Annuity rates look mysterious, but they come from three public ingredients: government bond yields, life expectancy tables and the options you choose. This page explains each one, shows how our estimator uses them, and how close it gets to the rates insurers actually quote.
1. Gilt yields
When you buy an annuity the insurer takes your pot and buys long-dated bonds: gilts (loans to the UK government) and bonds issued by companies, which pay a little more. It pays your income out of the interest on those bonds plus a slice of the capital each year. So the higher the yields on the day you buy, the more it can promise. The traditional benchmark is the 15-year gilt yield; the estimator uses the Bank of England's 5, 10 and 20-year yields, which it publishes every working day, and adds 0.33 percentage points for the extra return insurers earn on company bonds and pass on.
The sensitivity is large: a rise of 0.3 percentage points in yields adds about 3% to the income at 65, and the move from yields under 1% in 2020 to over 5% in 2026 took the income from a £100,000 pot at 65 from about £4,700 to nearly £8,000 a year. Today's rates shows the daily index and its history.
2. How long people live
The insurer promises to pay for life, so it needs to know how many years of payments to expect. It uses mortality tables: the chance of dying at each age, projected into the future. The estimator uses the Office for National Statistics' 2024-based projections for the whole UK population, following your birth year forward through the table, with two adjustments insurers also make. People who buy annuities live longer than average (they tend to be wealthier and healthier), so their death rates are taken as 0.77 times the population's, which adds about two and a half years of life at 65. And since 21 December 2012 insurers may not charge men and women different rates, so every rate blends the male and female tables (30% male in our fit).
3. The options you choose
Each option is a straightforward change to the sum. At 65, roughly:
- Joint life (income continues to a partner three years younger): 50% continuing costs about 7% of the income; 100% continuing about 12%.
- Escalation: an income rising 3% a year starts about a quarter lower than a level one; one rising with RPI inflation about 30% lower. It takes them about 20 years (3% a year) to 25 years (RPI, if inflation averages 3%) to pay out more in total than the level income.
- Guarantee period: 5 years costs under 1%, 10 years about 2.5%, 30 years about 15%.
- Value protection (unused pot returned on death): about 5% for full protection at 65.
- Payment timing: yearly in arrears pays about 4% more than monthly in advance, because the insurer keeps the money longer.
4. You: health, lifestyle and postcode
Insurers pay more if your life expectancy is shorter. The estimator handles this with a multiplier on the death rates and shows a range, because the uplift depends on medical underwriting of your particular case:
| Band | Death rates, times a healthy annuitant's | Extra income at 65, roughly |
|---|---|---|
| Smoker, or mild conditions (high blood pressure, high cholesterol, overweight) | 1.3 to 1.8 | 4% to 11% |
| Moderate conditions (type 2 diabetes, a past heart attack or stroke, lung disease) | 1.8 to 3 | 11% to 25% |
| Serious conditions (cancer under treatment, heart failure, kidney failure) | 3 to 6 | 25% to 50% |
About half of all annuities sold in the UK are enhanced in this way, so always declare conditions when you get quotes. Postcode pricing, based on local life expectancy, moves rates by about 2% to 3% either way; the estimator assumes an average postcode.
5. The sum
Yearly income = purchase price ÷ (the sum, over every future month, of: the chance you are still alive that month × the value today of £1 paid that month × the escalation factor for that month). "The value today of £1 paid in the future" comes from the gilt yield for that term plus the spread; "the chance you are still alive" comes from the mortality table. Joint life, guarantees and value protection change which payments count and how much they are.
6. How close it gets
Three settings (the spread over gilts, the annuitant mortality factor and the male/female blend) were fitted to Hargreaves Lansdown's published best-buy table of 27 August 2026. The table below compares the two. The typical difference is 1%, the largest 1.9%, across six product types and five ages.
| Yearly income from £100,000 (published best buy / this model) | Age 55 | Age 60 | Age 65 | Age 70 | Age 75 |
|---|---|---|---|---|---|
| Single life, level, no guarantee | £6,880 / £6,912 +0.5% | £7,283 / £7,329 +0.6% | £8,077 / £7,925 -1.9% | £8,851 / £8,819 -0.4% | £10,101 / £10,145 +0.4% |
| Single life, level, 5-year guarantee | £6,872 / £6,896 +0.3% | £7,269 / £7,302 +0.4% | £8,014 / £7,876 -1.7% | £8,737 / £8,723 -0.2% | £9,842 / £9,940 +1.0% |
| Single life, RPI-linked, 5-year guarantee | £4,337 / £4,328 -0.2% | £4,771 / £4,791 +0.4% | £5,518 / £5,418 -1.8% | £6,216 / £6,305 +1.4% | £7,506 / £7,554 +0.6% |
| Single life, rising 3% a year, 5-year guarantee | £4,819 / £4,772 -1.0% | £5,218 / £5,236 +0.3% | £5,955 / £5,869 -1.5% | £6,728 / £6,768 +0.6% | £7,944 / £8,039 +1.2% |
| Joint life 50%, level, no guarantee | £6,522 / £6,621 +1.5% | £6,949 / £6,944 -0.1% | £7,483 / £7,406 -1.0% | £8,163 / £8,091 -0.9% | £9,044 / £9,111 +0.7% |
| Joint life 50%, rising 3% a year, no guarantee | £4,431 / £4,478 +1.1% | £4,838 / £4,864 +0.5% | £5,463 / £5,386 -1.4% | £6,190 / £6,126 -1.0% | £7,169 / £7,191 +0.3% |
Held fixed and fed the yields of past dates, the same settings track published rates from 2020 to 2026 to within about 3%, over a period in which the income from £100,000 at 65 rose from £4,700 to £8,000. Insurers reprice every week or two, so after a sharp move in yields the daily estimate leads the market by a few days. A weekly check compares the model with the published table and the settings are refitted if it drifts by more than 2%.
What the estimator does not do
- It does not give quotes. Real rates differ between insurers (the market average is about 3.5% below the best) and depend on underwriting.
- It does not price fixed-term annuities, purchased life annuities bought with non-pension money, or annuities with guaranteed rates built into old pension policies (which can be far better than open-market rates: check before moving).
- It does not tell you whether an annuity is right for you, or when to buy. Drawdown, a mix of the two, or waiting are all possibilities that depend on your circumstances.
Questions people ask
What is an annuity?
A deal with an insurer: you hand over some or all of your pension pot and the insurer pays you a fixed income every month for the rest of your life, however long that is. Options let the income continue to a partner, rise each year, or be guaranteed for a minimum number of years. Once bought it normally cannot be changed or cashed in.
Why do annuity rates change?
Mainly because the yield on long-dated government bonds (gilts) changes. Insurers invest the money you hand over in bonds and pay you out of the interest plus a slice of the capital each year. As a rule of thumb, a rise of 0.3 percentage points in gilt yields adds about 3% to annuity income. Life expectancy assumptions and competition between insurers move rates too, but slowly.
Why did annuity rates rise so much in 2022 and 2023?
Gilt yields went from under 1% to over 4% as interest rates rose to fight inflation. The income from a £100,000 pot at 65 went from around £4,700 a year in 2020 to about £7,000 by 2023 and nearly £8,000 in 2026.
What is an enhanced annuity?
A higher income offered to people whose life expectancy is below average because they smoke, are overweight, or have a medical condition such as high blood pressure, diabetes, heart disease or cancer. The uplift ranges from a few per cent to over 40%. Around half of all annuities sold are enhanced, so it is always worth declaring your health when you get quotes.
Does my postcode affect my annuity rate?
Yes. Insurers use where you live as a guide to life expectancy. The effect is usually 2% to 3% either way, with higher incomes offered in areas where people live less long on average.
How accurate is this estimator?
For someone in good health it reproduces the published best-buy rates to within about 2% on the day, and its daily index tracked published rates from 2020 to 2026 within about 3%. Enhanced rates depend on individual medical underwriting, so the estimator shows a range. It is a planning guide, not a quote.
Is annuity income taxed?
Yes. It counts as income and is taxed through PAYE like a salary, using your personal allowance and tax bands. No National Insurance is due on pension income. The estimator shows the income after tax, with or without the State Pension.
Is this financial advice?
No. It is general information to help you plan. Whether an annuity is right for you depends on your circumstances. MoneyHelper offers free, impartial guidance (including Pension Wise appointments for over-50s) and can obtain real quotes from every provider; a regulated financial adviser can recommend a course of action.
Sources
- Bank of England Database: zero-coupon nominal and real government liability yields (series IUDSNZC, IUDMNZC, IUDLNZC, IUDSRZC, IUDMRZC, IUDLRZC) and Bank Rate. Open Government Licence v3.0.
- ONS: past and projected period and cohort life tables, 2024-based, UK. Open Government Licence v3.0.
- Hargreaves Lansdown best-buy annuity rates, used to calibrate the model (27 August 2026).
- Standard Life annuity rate tracker, used for the average-market comparison.
- FCA retirement income market data 2024/25: share of annuities sold enhanced.
- MoneyHelper: annuities explained.