Default Inflation / Growth Rates - Assumed Annuity Interest Rate

The Assumed Annuity Interest Rate preference is used as the default annuity interest rate, which is used to convert an accumulated pension fund into an annuity or to calculate payments when purchasing any future annuity.



This default setting can be overridden for any individual money purchase/Immediate Deferred Annuity in the plan by adjusting the relevant values on the Pensions > Immediate/Deferred Annuity 


Assumed Interest Rate

For Money Purchase go to Pensions > Money Purchase >Annuitization. 

Drawdown pensions can also be scheduled to be annuitised on the Pensions > Drawdown Pensions screen, under Annuitization. 



Options for calculating future annuity income

When annuitising, there are two ways that the software can calculate future income from the funds: either by specifying what the annuity rate will be or by allowing the software to derive an annuity rate based on the owner's age and gender. 


Option 1 - Specify the annuity rate

Where one has a reasonable idea of the applicable market (annuity) rate, taking account of the client's age and circumstances, etc., one can choose the option to 'Specify the Annuity Rate'. If chosen, the % entered is the straightforward 'Conversion Rate', i.e. the rate at which a lump sum converts into an annuity, e.g. a fund of £100,000 with a conversion rate of 5% will produce an annual income of £5,000.

(This option is probably what you should select, in this case).


Option 2 - Allow the software to derive an annuity rate (the software's default)

The software's default option, on the other hand, allows the software to 'derive' an annuity rate by using an 'Assumed Interest Rate' and it is for this 'assumed interest rate' that you have entered your figure of 2%.

The 'Assumed Interest Rate' on an annuity is the underlying interest rate assumption on which the annuity calculation is based (or would be based, by an actuary). It would ordinarily reflect an assumed yield on mid-dated UK Sovereign debt (Gilt yield).


We do not pretend to know what rate of interest would, in fact, give rise to a realistic annuity rate in today's marketplace. Secondly, the primary reason that the software defaults to using the 'assumed interest rate', in the first place, is because this option does take into account an individual's gender and age at the time the annuity is purchased. It will, therefore, give one a different result (other things being equal) when the client is 55 than it would when the same individual is 75 (for example).

In this instance, it is probably the 'Specify the Annuity Rate' option that you're looking for since you have a specific rate in mind. If you decide to use the 'Assumed Interest Rate' option, we generally recommend that you make allowances for provider costs/charges AND provider mortality assumptions. Therefore it generally makes sense to understate the expected yield.


Future Non-Pension Annuities - The Pensions > Immediate Deferred annuity screen can also be used to schedule the purchase of future non-pension annuities. Under status select "future" this will and schedule the future purchase on the timing screen.