Turning pension pots into income: How annuity rates shape pension sharing
A guide to annuities and why small changes matter
When we talk about pensions, there are two big questions:
How much is my pension worth today?
How much income will it actually give me in retirement?
To answer the second question, experts often use annuity rates. An annuity is a method of converting a lump sum of pension capital into a guaranteed income for life. The annuity rate is the percentage of your pension capital that would be paid to you each year as income. For example, an annuity rate of 5% means you’d receive £5 a year for every £100 of pension capital given up.
We turn pension savings into the income they could provide, and your guaranteed pension income into an equivalent capital amount using suitable annuity rates. This allows us to compare all your pensions on a like-for-like basis.
Why annuities?
At retirement, you may have more choices for taking your pension so you might not choose to convert your pension to an annuity. You could instead take withdrawals directly from the pension pot, for example. No doubt you’ll want to speak to an Independent Financial Planner to help make that decision.
But for pension sharing they are a very useful yardstick. Why?
They’re guaranteed: once set, the income is fixed for life (with or without increases).
They’re objective: the market sets the rates, so they’re independent of individual investment views.
They’re transparent: easy to explain to courts and clients as “this is what £100,000 would buy based on today’s rates”.
The annuity setup we use
The annuity rate you get depends on some key decisions you make about the way the annuity is set up. For pension sharing, we commonly use the following setup:
Single-life annuity: we assume the income stops when the individual dies.
Escalation of RPI each year: this reflects the fact that many pensions increase with inflation, and it makes the comparison more realistic.
5 year guarantee period: payments are guaranteed for the first five years, even if the individual dies during that time. After five years, the income stops when the person dies.
Applying the same setup to all the pensions gives us a fair and consistent way to compare like-for-like.
Why interpolation matters
The annuity rates we use are published at 5-year age points (65, 70, 75 and so on). But retirement can fall in between. If someone retires at 67, we can’t just pick the 65 or 70 rate - we use linear interpolation.
This means we work out the rate that sits fairly between the published ages. It’s a simple and transparent way to make sure the calculation reflects the exact age at which the pension will be shared.
Where we get our annuity rates
We use the rates published on the William Burrows Annuity Project website:
🔗 https://www.williamburrows.com/calculators/annuity-tables/
The reason we use this site is simple - it is publicly available and can be checked by any interested party. That way, our assumptions are open and verifiable.
The sensitivity of annuity rates
Here’s the important bit: small changes in annuity rates make a big difference to the capital value.
For example:
If the annuity rate is lower, it takes more capital to buy the same income.
If the annuity rate is higher, it takes less capital to buy that income.
Even a change of just 0.25% in the annuity rate can make a big difference to the capital value we calculate for a guaranteed pension, or the income we calculate from a pension pot. That in turn can affect the percentage split in a Pension Sharing Order.
You can’t do anything about this, annuity rates are based on assumptions and market conditions outside of anyone’s control.
The Bottom Line
Converting pension capital into income is never exact, but annuities give us a clear, consistent, and market-based way of doing it.
We always use single-life, RPI escalating, 5 year guarantee annuity rates to keep things fair and consistent.
We interpolate between ages where needed, so retirement at 67 doesn’t get treated the same as 65 or 70.
We rely on the William Burrows website because it is transparent and accessible to everyone.
This approach gives clients, solicitors, and the court a clear picture of what pensions are really worth in income terms, with no hidden assumptions.