Your Personal Pension is not a typical investment. It’s a member of the fixed income family, like bonds, but does not have a maturity date. Instead, your Personal Pension will generate income for as long as you’re alive. Living until your life expectancy will generally produce a return comparable to a long-term A-rated bond. The longer you live, the higher your effective return will be, and vice versa.
When you contribute to your Personal Pension you are giving the insurance companies small increments of money that they invest on your behalf. Because the insurance companies are using your money to invest, the interest rate at the time of this transaction determines the insurance company’s cost of borrowing. The higher the interest rate at the time, the higher the return you receive for giving the insurance company money.
With the Personal Pension you start small and make contributions over time. For every contribution you make, your Personal Pension purchases you a small income annuity at the best rates available. This way, you can benefit from higher rates starting at a younger age and still have the ability to capture rate increases with future contributions. At the end, your Personal Pension provides you a diversified portfolio of income annuities that will generate guaranteed, lifelong income.
Interest rates are not the only factor driving the amount of income you’ll get from your Personal Pension (known as annuity rates). Age is a big factor, and the longer you wait the less income you’ll get for every dollar you contribute. It’s the same idea as compounding interest: the longer the duration of time, the more interest generated. Your gender is another factor. Females tend to live longer than males, and thus receive lower rates. That’s because the insurance company expects to provide income to females for longer than males.