Annuity rates slide
Annuity rates have started to slide again, according to the latest figures from Alexander Forbes Annuity Bureau.
The figures show level annuity rates have suffered significant falls this month after a brief period of stability at the beginning of the year.
Aviva is currently offering the best rates but its rates dropped from £6,420 to £6,280 this month, based on a 60-year-old male purchasing an annuity with £100,000.
Women’s annuity rates have fared slightly better with Aviva dropping its rate from £6,070 to £5,960 this month and Canada Life holding its rate at £5,782.80 from March (both based on a 60-year-old woman purchasing an annuity with £100,000). However, this time last year Canada Life was offering £6,046.20.
Tim Whiting, director of Alexander Forbes Annuity Bureau, says: “April has been a disappointing month for annuitants with most providers dropping their rates across the board.
“There were some surprises from well-known names and we urge all those approaching retirement to consider taking the open market option [it means you can shop around for a higher annuity] to get the best rate.
“We would also urge careful consideration of the possible alternatives. In changeable market conditions it is sensible to consider the whole range of retirement options.”
Annuity rates vary from one life company to another, so it’s important to shop around to get the best deal for you.
If you have a personal pension, your provider should send you information about six months before you’re due to retire saying what it will offer you based on the value of your fund.
There are a couple of things you can do to get a better annuity rate. The first is delay the age at which you buy an annuity. The older you are the better rate you’ll get and your pension fund could also grow.
You can also get a better annuity rate if you’re eligible for an impaired life or enhanced annuity. An enhanced annuity is when the insurer expects your lifespan to be shorter than average due to illness, and so offers you a better rate to reflect this.
If you're a smoker or overweight you might also receive a better rate than normal for similar reasons. The rate for smokers could be 20% or more higher than that for non-smokers.
Open market option
People who have a money purchase or defined contribution pension, at retirement must use their fund (minus an optional 25% as tax-free cash) to purchase an annuity. As the annuity market is very competitive and rates differ vastly between annuity providers on a daily basis, the open market option is your right to shop around and buy the annuity from the company offering the highest rates at that time.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.