No time like the future if you want to sign up for an annuity

THE "no second chances" nature of buying an annuity make it arguably the most important financial decision most people will ever make. And at a time when annuity rates are falling and pension funds struggle to recover value lost in the downturn, the consequences of tying into the wrong product can be far-reaching.

However, more options are opening up for retirees who want to delay buying a lifetime annuity but don't want to leave their funds invested. Recent years have produced a raft of so-called variable annuity products offering a combination of income drawdown and conventional annuities. Now, though, more choice is available for those looking for extra flexibility in traditional annuities.

Extra choice in retirement is the focus of two new annuity plans launched this month. First up was LV>, with its Protected Retirement Plan (PRP), aimed at people wanting short-term income security before they are tied down to longer-term options. The plan offers guaranteed income for fixed terms of between three and 25 years (as long as it ends before 75), meaning retirees can buy an annuity then review their options at a later date, rather than being stuck with their initial purchase. When the term ends, annuitants can either buy another PRP, fix into a conventional annuity or transfer their funds to an unsecured pension.

Until now the only similarly short-term option has been available from Living Time, which offers a set level of income for the term of the annuity, after which another fixed-term product or a lifetime annuity can be bought.

Flexibility isn't the only advantage of fixed-term annuities, which also allow for changes in circumstances and in physical health. Tom McPhail, head of pensions at Hargreaves Lansdown, pointed out that many people buying an annuity in good health at 65 may qualify for a more generous enhanced annuity at a later date.

"I am persuaded by the disability free life expectancy (DFLE] stats and the fact that average DFLE for a 65 year old (male or female) is around 10 years. So if you are in good health at 65 there is a 50/50 chance that you'll be able to get an enhanced annuity by age 75. That being so, why would you want to buy a lifetime annuity now?"

But there is something of a gamble on future annuity rates, which are likely to continue falling over the long-term as people live for longer and in better health.

Flexibility of a different kind is the aim of another new product, from MGM Advantage. Its Flexible Income Annuity is a variable lifetime annuity, aimed at those wanting more potential for the growth than from conventional annuities but not comfortable with the risk of full drawdown. Investors can choose an income level of between 50 and 120 per cent of that available from a conventional annuity and review the income level every five years. As in variable annuities, there is potential for growth as the annuity is investment-linked, but there is a minimum income guarantee below which the plan cannot fall.

The extra flexibility of these plans invariably comes at a cost, however. Douglas Baillie, director of Perth IFA Douglas Baillie Ltd and founder of www.comparemypension.com, said: "Some of these plans can be quite expensive to run and people need to be aware that they are 'locked in' for the term of it, must buy a further annuity when that term expires, and cannot possibly have any idea of what their replacement annuity rates might be in the future."

For the vast majority the default option at retirement remains buying a level or index-linked annuity, however. The biggest boost that many people can give their retirement fund is to use the open market option (OMO) to shop around for the best annuity when they draw their pension, rather than accept the first rate on offer from their existing pension provider. Baillie recently built on the success of comparemypension.com with a new pensions comparison site – www.comparemyannuity.com – allowing those wishing to access their pension benefits to evaluate their options.

More than 70 per cent of those using the site so far have been able to secure a higher, fully guaranteed annuity with a pension company other than their existng provider, Baillie claimed. "This statistic alone serves to highlight and prove the poor value of most other annuities," he said.

Increases in annuity income of an extra 25 to 50 per cent a year are increasingly common, said Baillie. In one exceptional case a 66-year old woman who used the website secured an 62 per cent annual increase in her retirement income.

Baillie said: "People can boost their income by as much as 40 per cent compared with what was originally on offer. But unfortunately, very few people fully understand the significance of exercising the OMO and seem content to buy the only annuity on offer to them being made by the companies with whom they have accumulated their pension funds."