Shop around to find the best annuity for you

No matter what you're buying, shopping around is usually the best way to get the cheapest deals and the best rates. But when buying an annuity it's crucial to thoroughly research the market. That's because this particular purchase could very well be the single most important financial decision you make in your lifetime: as an annuity sets the amount of income you receive in retirement and therefore the rest of your life.

Research from Hargreaves Lansdown shows the difference between the best and a worst rate for a conventional annuity can be as much as 31%. So with a pension pot of £18,000 the income you receive could range from £840 a year with the worst provider to £1,100 with the best. Over 25 years that could leave you £6,500 out of pocket – more than a third of your original pension fund.

Find the best annuity rate for your circumstances

For an enhanced annuity - which pays higher rates to those with health problems - the difference is much greater at 46%. With an £18,000 pension, the difference would be between £1,214 and £1,778 a year. Over a 25-year period, by the selecting the lower rate you would be £14,100 worse off.

Boost your income

Stephen Lowe, management board member of the Pension Income Choice Association (PICA), says the only way you can tell that you are getting a good deal when it comes to buying an annuity is by doing your own research first.
"People should never accept the first annuity offer they receive because the difference in income between the best and worst rates in the market could be many thousands of pounds."

However despite the benefits of shopping around, Hargreaves Lansdown reckons more than half of retirees simply plump for the deal offered to them by their pension provider.

Are pension providers ripping us off?

While consumer lethargy invariably plays its part, pension providers have also been
accused of pushing their own annuities and failing to fully communicate the fact that policyholders could receive a higher income by shopping around.

In order to tackle this problem head on the Association of British Insurers launched a code of conduct for its members (who account for 95% of the annuity market) in 2013. It is designed to encourage people to look around for the best retirement income plan, and help them better understand their options.

What information should you get?

Under the code, members must provide clear information early on to prospective retirees informing them of their options, including the benefits of shopping around and combining small pensions.

They also have to explain the different ways retirees can take retirement income, providing for dependants such as your other half, eligibility for an enhanced annuity (if you have health problems) and ways to protect themselves against inflation.

Under the code insurers are also banned from including annuity application forms in their retirement packs, on the grounds that they discourage savers from shopping around.

When the code came into force in March, Otto Thoresen, the ABI's director general, said: "The code will help people approaching retirement have the confidence to make the right pensions decision. Increasing life expectancy and an era of low interest rates makes the need to secure an adequate retirement income greater than ever."

Best and worst annuity rates

In August, the ABI took a further step by publishing annuity rates – effectively naming and shaming those providers offering the worst rates. The idea was this would allow retirees to see just how much they stand to lose by selecting the wrong one.

So has all this made any difference? John Perks, managing director of retirement solutions at LV=, says, the company has seen more people shopping around for annuities, something he attributes squarely to the introduction of the code.

But, he adds, the biggest effect the code has had is that more people are shopping around for an 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. The Money Advice Service estimates enhanced annuities can pay up to 40% more than a standard annuity.

The best annuity providers in 2013

Enhanced annuities

But by not shopping around, many retirees are not aware they are entitled to enhanced annuities. According to Hargreaves Lansdown, while as many as 70% of people could qualify for an enhanced annuity, only around 3% of those who buy an annuity from their provider get an enhanced rate, whereas of those that shop around over 50% get an enhanced annuity.

Smoking, diabetes, high cholesterol and raised blood pressure could all make you eligible for an enhanced annuity as well as more serious health complaints such as heart disease, cancer and stroke.

Perks says: "In the past, only people who were classed as seriously ill would have been likely to consider an enhanced annuity. Increasingly, there is now a growing awareness of this product, and the retirement income benefits it can offer, among people with minor impairments who would either have not qualified for an enhanced annuity previously or would simply not have known about them."

How to shop around

It's easy to shop around for annuities using one of the many free annuity comparison services available from sources including The Money Advice Service, Hargreaves Lansdown and specialist brokers including the Annuity Bureau.

You'll be asked how much you have in your pension, how you want to receive your income, whether you want it to be paid for a guaranteed period, to be paid to a spouse in the event of your death and whether you want your income to rise in line with inflation. By answering questions about your health and lifestyle you can also find out if you qualify for an enhanced annuity.