Annuity rates are the latest target for mis-selling firms according to a recent FT article. It is vital you shop around if you are to secure the maximum income available to you based on your specific needs and circumstances, this blog explains what an annuity is and why you should shop around.

Annuity rates are the yields available to exchange a guaranteed annual income for life in exchange for an accrued pension fund. The yield is based upon a number of personal factors including age, gender and state of health but also systemic factors include the prevailing yield on government gilts which are used by annuity providers to cover their liability and assumptions on life expectancy. Where you live can also affect the annuity rate you may receive; someone living in a inner city housing estate is deemed to have a lower life expectancy than someone living in, say, Surrey.

The trend has been for annuity rates to fall (so the annual income an individual can receive for life now with the same value pension fund is less now than historically). This is for two primary reasons; firstly we are living longer so annuity providers set annuity rates lower so that they are not paying out more in income than they receive from pension funds and secondly, the yield on gilts has been falling over time.

Pension providers (who also provide annuities) will quote the annuity rates available to individuals as they approach retirement but they are also obliged to offer an Open Market Option. The Open Market Option is the option for the retiree to transfer his accrued pension fund to another annuity provider which offers a better rate than the incumbent provider. It is common for annuity rates offered via the Open Market Option because the incumbent provider may not want to attract annuity business and so offer lower annuity rates or if I am to be cynical because they expect a percentage of retirees not to compare the market for higher annuity rates so individual apathy can lead to higher profitability for the provider.

It is therefore imperative to shop around and understand what the maximum annuity rate is they can receive in retirement. Failure to do so can not only result in a lower income but also a inappropriate annuity type: Purchasing an annuity is like buying a car; the more options you add the more expensive it becomes. An expensive annuity equates to a lower annual income but the options you add may be important to you. For example you may wish to include the following:

- An income that increase annually to keep apace with inflation.

- An income for a spouse to be paid after your death.

- A guaranteed period during which time the balance of the annuity income is paid should you die for the balance of the guaranteed period (typically five or ten years).

In addition, if you have a particular illness or lifestyle that impairs you life expectancy you may qualify for a higher annuity rate from an Enhanced or Impaired Life annuity provider.

Awareness of the availability of better annuity rates is an important part of Financial Planning education if retirees are to maximise their incomes in retirement. My fear is that the growth of firms advertising their mis-selling services is another step down the road to a US style litigation, “some one else is to blame”, culture with less scrupulous law firms looking to cash in on an opportunity.

You can get an idea of what annuity you may receive by clicking here or if you would like to explore the options available to you at retirement (you do not have to buy an annuity until 77 based on current rules) click here.

Andrew Neligan is an award winning, fee based Chartered & Certified Financial Planner who assists legal professionals achieve their lifetime goals through Financial Planning

The source of the graph linked to in this blog is www.retirement-partnership.co.uk . They are independent of Informed Choice Ltd.