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How to get the best annuity rate

With final salary pension schemes slowly dying out, increasing numbers of people will retire having paid into a defined contribution scheme, also known as a money-purchase scheme. This is where the amount an individual receives upon retirement depends on how much they paid in and how well their pension fund performed.

With this type of pension, when you retire you can either convert your pension pot into an income by purchasing an annuity, or keep it invested and withdraw money from it whenever you need it – known as income drawdown.

Here's some pointers on finding the best annuity rates and choosing the best annuity for you:

  1. An annuity is a contract with a company to provide you with an income for the rest of your life, which you buy with your pension pot. How much you get depends on the size of the pot, your age, occupation, any illnesses, whether you' are or have been a smoker, whether you are taking out a single or joint policy, as well as interest rates and other economic factors.
  2. Your pension provider will offer you the option of buying an annuity as you near retirement and many people do this because they feel it is the easiest and most convenient option. However, your pension provider is under no legal obligation to offer you the best rate and it is more likely that an alternative provider will offer you the best annuity.
  3. Even the best annuities are somewhat of a gamble – if you live in retirement for a long time, you'll have earned a lot of money from your pension pot; but if you die within a year of retiring, you might lose your money to the annuity provider (unless buy a joint life annuity, where some of it is passed onto a partner).
  4. Health is an important factor. If you're in ill health, or are a smoker, you can buy what's known as an enhanced annuity. These pay more because the annuity provider does not think, statistically, that you'll live very long; whereas non-smokers will get less.
  5. Annuity rates have fallen in recent years. For someone aged 60 with a £100,000 pension pot, the best annuities are currently paying a “level” income of between £4,600 and £5,000 a year from it. This will fall if you choose for your annuity income to rise in line with inflation; and will fall further if you choose a joint life annuity (which continues to pay a smaller income to a wife or partner after you die).
  6. Once you have set up an annuity, the income is fixed for life and you cannot change it, nor can the annuity provider pay you less; although if you choose a level annuity it will be eroded by inflation.