Browse Sections

• Personal finance 
• Health and beauty
• Dating
• Holidays
• Hotels
• Food and drink

Boost your pension income

Martyn Hocking, editor of Which? Money
23/ 6/2008

ANYONE currently paying money into a personal, stakeholder or money purchase pension scheme will probably have to buy an annuity to fund their retirement.

Under current rules, you have to convert the money you have built up in your pension scheme into an annuity before you reach 75.

A new Which? Money survey has found that consumers know relatively little about annuities and don't always seek expert advice before choosing one.

Nearly a quarter of the people we quizzed either have an annuity or are approaching retirement and will need to buy one soon.

However, just under half of those with an annuity (46 per cent) had sought the advice of an independent financial adviser.

This is worrying, because our research has shown that there are significant differences in the performance of the best and worst annuities.

AN ANNUITY EXPLAINED

An annuity converts a lump sum (usually a pension fund) into a regular income that will last as long as you live. The income is taxable, and the amount that you get each year will depend on the size of your fund, the rate the annuity company offers, your gender, age and health, and the type of annuity that you opt for. You are allowed to take up to a quarter of your pension fund as a tax-free lump sum and must convert all of your remaining pension into an annuity before the age of 75.

WHICH ANNUITY?

Most people opt for a conventional lifetime annuity, but there are several options to pick from.

Level annuity. Your income will stay the same each year, irrespective of inflation.

Increasing annuity. This can either match inflation for the rest of your life, or rise by a specific percentage each year.

Guaranteed annuity. This will continue to pay out for a time to a nominated individual if you die soon after retiring.

However, your income will be lower than with a level annuity.

Joint-life annuity. A joint annuity gives your partner some or all of your continuing income if they outlive you.

Investment-linked annuity. If you have a larger pension fund, you may prefer to invest it in the stock market. This means that your annual income could go down as well as up.

EXPLORE YOUR OPTIONS

Many people assume that they have to buy an annuity from the company that has held their pension.

This is not the case, as you have the right to shop around for the best rates when you retire - it's called the open market option (OMO).

Worryingly, figures from the Association of British Insurers (ABI) show that 61 per cent of people who bought an annuity in 2007 did not shop around in this way.

GET THE BEST DEAL

Our research highlights that there are huge differences between the level annuity rates offered by the various annuity providers - underlining the fact that you should use the OMO.

For a man aged 70, the difference between the best and worst rates was £1,332 a year, which means that you would be £17,316 better off over the average lifetime by choosing the best deal.

Similarly, a woman aged 60, opting for a 10-year guarantee, could secure an extra £23,328 by picking the right annuity.

A FLEXIBLE OPTION

Conventional lifetime and investment-linked annuities are purchased for life - you cannot change your mind and switch to another one later on.

If that sounds too rigid, you might want to have a look at the `third way' products offered by Canada Life, Hartford, Lincoln, London & Colonial and MetLife, or the lower-cost, fixed-term annuities available from Living Time.

These can be bought in blocks of five years or more, so you can make your retirement income decisions in two or more stages.

CHECKLIST

Follow these tips to get the most from your annuity:

1, Choose the best option. Shop around for the best annuity rates using the open market option, and don't just accept what your pension company offers.

2, Get good advice. It is important to talk to an independent financial adviser who specialises in annuities before you make your decision.

3, Think about inflation. You can make your annuity `inflation-proof' by having it increase in line with price rises, although you'll start off with a lower income than if you'd chosen a level rate.