How to fight falling annuity rates

Older couple on beachThe pension annuity market is rife with "sharp practice and murky pricing", according to a recent report from the National Association of Pension Funds (NAPF).

It claims that private sector workers are losing out to the tune of £1 billion as a result. Here, we explain how you can get a better deal - and enjoy a wealthier retirement.

Shop around
The authors of the NAPF report, written in conjunction with the Pensions Institute at Cass Business School, argue that it is too difficult for savers to get the best deal because one in four have a pension pot of less than £50,000, making it difficult to find independent advice.

But whatever the size of your pension fund, you can get a lot more for your money by shopping around, with the NAPF also pointing out that part of the problem stems from the fact that two-thirds of people are unaware that they do not have to cash in their annuity with their pension provider.

This is bad news for their retirement incomes as they can often obtain a much better deal from another provider.

For example, a healthy, 65-year-old man with a pot of £100,000 could receive a pension of £5,000 a year from his insurer. But, according to financial adviser Hargreaves Lansdown, he could increase that to £5,800 if he shopped around.

Choose the right type of annuity
There are lots of different types of annuities to choose from, and your annual retirement income could rise or fall by thousands of pounds depending on which type you buy.

Factors to bear in mind when making your decision include whether you want your income to rise in line with inflation, the state of your health, whether you are a smoker and whether anyone else is financially dependent on you.

Most people choose level annuities, probably because they offer the highest starting income. However, they do leave you vulnerable to inflation, with an annual rate of just 4% halving the buying power of an annuity after 18 years.

It is therefore important to consider whether you want to maximise your income during the early, healthiest years of your retirement or equal purchasing power over the years.

The next decision is whether you want an annuity that covers you alone, or one that protects your partner as well should you die first.

A joint life annuity will typically pay around 50% to 67% of your annuity income to your partner after your death. However, the rates on offer are lower than those for single-life annuities.

Investigate enhanced annuities
If you smoke, are overweight or have a health problem, then it is definitely worth looking into getting an enhanced or impaired life annuity.

It is estimated that up to one in three of us could qualify for an enhanced annuity, which could increase your annual income in retirement by 20% or more.

You will generally have to go through an independent financial adviser to get an enhanced annuity, while the insurer providing it will also probably and need medical information from your GP.

Consider investment-linked annuities
Investment-linked annuities, including with-profits and unit-linked products, are linked to shares and corporate bond prices.

Consequently, you could benefit from future stock market growth even after you have started drawing your pension.

This makes them a good option for anyone prepared to take on some risk in the hope of getting a higher retirement income. There are no guarantees, though, and your income may even fall should the underlying investments lose value.

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