Pensions: An income for life

By JEFF SALWAY
Published on 18/08/2012 14:25

AN ESTIMATED 5,000 people a week buy an annuity to convert their pension pot into an income for life – and the income rates on annuities are plummeting.

The decline in annuity rates has accelerated this year, due largely to quantitative easing (which through buying up gilts has driven down the gilt yields used as the basis for annuity pricing).

But while drawdown is an increasingly popular option for those reaching retirement and reluctant to annuitise, the latter is the only realistic course of action for the vast majority of retirees.

There are ways of maximising the income you get, however. The most obvious is to shop around for the best annuity deal on the market, rather than taking the first offer from your existing pension provider. Under the Open Market Option, savers have the right to reject their pension provider’s deal and compare rates from other companies.

With a gap of around 20 per cent between the best and worst value annuities on the market, shopping around for the best rate can deliver a massive boost to your retirement income.

Enhanced annuities are well worth checking out, too. These pay out more to those with lifestyle issues – such as a smoking habit – or who are in ill health and therefore have compromised life expectancy.

You don’t need an immediately life-threatening condition to qualify; obesity, high blood pressure, diabetes and high cholesterol are among the dozens of conditions that could secure you the income uplift of up to 40 per cent that enhanced annuities provide.

The timing of buying an annuity is important, too. While you can’t reverse a purchase, you can phase it by using some of your pot to buy one annuity now and another one later. Similarly, there are now fixed term annuities available that pay out for specific terms, such as five years. You can then buy another one or take out a conventional annuity.

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