Top annuity rates
Aviva offers some of the best annuity rates in the market, with LV= and Partnership providing the top rates for smokers and those with health problems.
Rates sourced by Annuity Direct reveal that Aviva has the best rates for level annuities for men and women at age 65 and 75. A 65-year-old man with a £100,000 pension can get a £6,585 annuity from Aviva.
If the same man smokes 20 cigarettes a day, he could get a £7,417 annuity from LV=. With rates at an all-time low, potential annuitants need to ensure they source the best rate.
According to Fair Investment Company, which provides an annuity rate comparison service, a customer had a pension of £5,823 and was quoted £181 per year from his pension provider. However, by trawling the market, he got £255, an increase of 41%.
Pension providers are required to highlight the 'open market option' – the right of the customer to check the market for the best rates – when contacting their customers as they approach retirement.
But according to the Association of British Insurers, only two thirds of annuity purchasers use the OMO.
The government is now planning to overhaul the OMO process, potentially through regulation.
Gemma Goodman, associate director at the Annuity Bureau, comments: "We urge the government to act as quickly as possible on the open market option. Thousands upon thousands of people live through their entire retirement on second-rate pensions just because they don't shop around for annuities."
This article was originally published in Money Observer - Moneywise's sister publication - in October 2010
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.
Association of British Insurers
Established in 1985, the ABI is the trade body for UK insurance companies. It has more than 400 member companies that provide around 90% of domestic insurance services sold in the UK. The ABI speaks out on issues of common interest and acts as an advocate for high standards of customer service in the insurance industry. The ABI is funded by the subscriptions of member companies.
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.