Gap between the best and worst annuity rate widens

Retirees looking to buy an annuity could earn up to16% in extra income by hunting down the best rates. 

Research from the Just Group, a financial services company that specialises in retirement income, found the gap between the best and worst deals on standard annuities has widened to its highest gap in four years. 

Here, Which? explains how annuities work and how to find the best rate on the market.

How annuities work

An annuity is an insurance product that allows you to swap your pension savings for a guaranteed regular income that will last for the rest of your life.

How much you get is determined by the rate the annuity provider offers and the type of annuity you choose.

People who have serious health problems should be offered a higher rate than someone who's likely to live for many years. The insurer is essentially taking a bet that it won't end up paying out more than the total pot.

The inflexibility of annuities is one of the reasons their popularity dwindled after the pension reforms of 2015, with annual sales falling from 353,000 in 2013, worth £11.9bn, to just under 70,000 in 2022.

• Find out more: what is an annuity?

How much you'll get in retirement 

Income from an annuity is determined by the rate offered by the provider you choose.

If you have £100,000 in your pension pot and are offered 21an annuity rate of 5%, you’ll get an annual income of around £5,000 a year. 

The payment will be the same each year, although you can opt for an income that increases in line with inflation.

• Find out more: annuity rates explained

Make your money go further

Find the best deals, avoid scams, and grow your savings with our expert guidance. From only £4.99 a month, cancel anytime.

Join Which? Money

Why you should aim for the best rate

The Just Group found that retirees that fail to shop around for the most competitive annuity rate could lose out on 16% extra income over their lifetime. 

For example, a 65-year-old in good health, using £50,000 of pension to purchase a standard Guaranteed Income for Life, could generate £3,378 a year income from the best deal, compared to £2,900 from the worst – a difference of £478 a year. 

This is the equivalent of around £12,000 extra income over a 25-year retirement. 

Stephen Lowe, group communications director at Just Group, said these figures are a ‘timely reminder for retirees to shop  around for the best deal, rather than staying with your current pension company’. 

The latest analysis by Just found the difference between the best and worst has climbed above 16% in April, compared to an average difference over the past four years of about 9%.

• Find out more: annuity rates explained

How annuity rates can change

Annuity rates are based on several factors, including the size of your pension, your age and the external economic environment.

Annuity providers back their annuities by buying long-term (usually 15-year) UK government bonds, known as gilts. 

As long-term gilt yields increase or decrease, so too do annuity rates. High interest rates push up these returns, so a rise in interest rates should push up annuity rates as a result. 

Annuity providers regularly reset their Guaranteed Income for Life (GIfL) rates depending on wider conditions in the financial markets, so the only way to be sure of getting the best deal at any time is to do a comparison at the point of accessing a pension.

• Find out more: Bank of England base rate rises to 4.25%

Rates hit a 14-year high

Low interest rates since 2008 set annuity prices on a downward spiral. 

They bottomed out in the summer of 2016 (after the Brexit vote) and in March 2020, when the base rate was cut to 0.1% at the start of the Covid pandemic. 

Since November 2021, rising inflation and the resulting hikes in the base rate have reversed the trend and they’re now at a 14-year high.

Which? Money Podcast

Join us on our weekly audio show for the latest money news and personal finance hacks to help make you better off.

Listen now

Tips for choosing the right annuity  

The type of annuity you choose will determine how much income you get and what happens when you die.

Do your research 

There are many different types of annuity, and you should think about what is right for you.

For example, a level annuity will pay you the same income each year, while an escalating annuity will rise each year at a fixed rate. 

You can also get annuities that rise in line with the Retail Price Index measure of inflation.

If you’ve suffered from poor health, it’s important to declare this at the outset. You might qualify for an  enhanced annuity. These pay out higher starting amounts (often an uplift of 15-20%) than normal, due to the assumption that you won’t live as long as those in good health.

You can see all the different types in our guide on annuities.

Get financial advice or guidance 

Buying an annuity is a big decision, so seeking help from an independent financial adviser is a good idea.

Advisers research the annuity market for you and make a recommendation based on your goals.

You can also get guidance from the Government’s Pension Wise service – this offers free, impartial guidance on a range of options. 

• Find out more: how to get retirement and pension advice

Compare providers 

It's vital to compare providers before you buy an annuity – each year people throw away an estimated £1bn in pension income by not shopping around. 

You can use tools such as the MoneyHelper annuity comparison tool, or use annuity brokers to find the best deals currently available in the market, and tailored to your circumstance.

Only non-advised providers will give you a quote without you taking advice first. There may be annuity providers offering higher rates only via a financial adviser.

• Find out more: how to buy an annuity