Is now a good time to buy an annuity?

Very few people get through life without regrets.

Whether it was buying that house before the market slumped, choosing Betamax rather than VHS or just picking fish over chicken last night at dinner, we all have decisions we wish we could remake.

However, hindsight is 20:20 and unless you have a crystal ball under your desk, it is very hard to be spot on with your choices all the time.
That said, you can mitigate the potential for problems. This is exactly what I tell people when they ask me whether now is a good time to buy an annuity. Yes, annuity rates are low at the minute and at some point in the future, the chances are they will improve.

But unless that crystal ball is handy, it is almost impossible to say exactly when. Do you really want to put your retirement on hold on the premise that things may get better sometime?

So the answer is not only to shop around and get the best possible rate, but also to structure your retirement so you get the maximum benefit from the retirement savings that you do have. So what should you do?

Deferring buying an annuity
Firstly, remember that the income you will get from your annuity is based on a variety of factors, including how long your insurer thinks they will have to pay out for. By managing this variable, you can get a better deal from your pension pot.

You don't have to buy an annuity just because your pension plan is maturing and you have received a letter though the post. Indeed, as the vast majority of pension schemes were set up before the end of the default retirement age, you may find that you are still working when you receive this type of notification.

So you can choose to put off buying an annuity until you need the income, are potentially in a lower tax bracket and would get a higher income from your pension pot due to your age. You can also defer taking your State Pension if you so wish.

If you do defer taking an annuity, when the time comes to cash in your pension, you will likely get a higher income because you are older, all other things being equal. There is also – somewhat morbidly – more chance of developing a medical condition which means you qualify for an enhanced annuity which pays more.

The problem is that you don't receive the income that you would otherwise have had while you deferred, and it can take 15 to 20 years to make back the income you've forgone – quite a sacrifice if you need the income now.

Free annuity calculator

Split your pots
You don't have to annuitize all your pension pots at once. You may find that at the start of your retirement, your State Pension, income from part-time work and your savings/investments mean you are financially comfortable.

So rather than converting all your pension pots into one and annuitizing, you can do this in phases.

Shop around!
This piece of advice is always relevant but when annuity rates are at what some are calling historic lows, it's more important than ever.

The Association of British Insurers (ABI) recently published example rate tables which clearly show that for a 65-year old purchasing an annuity with a pot of £18,000, the annual difference between the best (£1,099) and the worst (£839) was £260. And if they had smoked for 10 years, the rate would have been even higher at £1,277, which is £438 more per annum.

Now the ABI is very clear that these are simply examples, but it does clearly illustrate that by not shopping around, people can lose a significant amount of their annuity income. It is therefore incredibly worrying that only 30% of people take an annuity with a company other than their pension provider.

So, is now a good time to buy an annuity? As you can see, that rather depends on you and your circumstances. By making smart choices and shopping around, you can make the most of your retirement income in almost any interest rate environment.

7 ways to improve your retirement
See Gallery
Is now a good time to buy an annuity?

If, like many Britons, you have failed to save the cash you need to maintain a comfortable standard of living in retirement, one option is to sell your home and downsize to a smaller property, using the money leftover to cover your living costs.
If moving out of the family home is too much of a wrench, however, the good news is that equity release schemes allow you to stay in your house or flat while still using the equity built up in it to provide some extra cash. The downside of the schemes, which work a bit like mortgages, is that you may not have much left to pass on to any children or other relatives.
But that's a small price to pay for a reasonable standard of living. For more information, try Age UK on 0800 169 6565.

Choosing the right annuity can have a significant impact on your retirement income. And as with most pensions, you automatically have what's called an 'open-market option' (OMO), you can scour the market for the highest annuity rate.
It is worth checking what your pension provider is offering first, though, as some companies offer guaranteed rates for existing customers that are likely to beat those available elsewhere. The Pensions Advisory Service on 0300 123 1047 is a good place to get some free advice.

On retirement, most people convert their pension fund into a guaranteed income annuity that pays out the same amount every month for the rest of their lives.
However, you can also choose an increasing annuity that pays out smaller amounts in the first few years but offers larger payments further down the line. This may prove a wise move if the rate of inflation remains at over 2%.

It is now easier to work later in life because the "default retirement age" has been scrapped.
People approaching retirement age and worrying about money can therefore choose to work for a few years longer - potentially transforming their financial situation. Other than the extra income from working, these people can look forward to higher state pensions, and higher annuity rates due to their greater age.
They can also benefit from bigger tax allowances and the fact that they no longer have to pay National Insurance contributions. Check out this nidirect website for more details.

You could get a much better rate with an impaired-life annuity if you have a medical condition that is likely to reduce your life expectancy.
Incredibly, even snoring, which is a common symptom of Sleep Apnoea could have an impact.
According to figures from MGM Advantage, a man with this condition could receive an extra £12,000 retirement income over the course of their retirement - or £571.44 extra money each year. Click here to find out more.

To maximise your retirement income, it is vital to ensure that you are receiving all the benefits to which you are entitled. These include the basic State Pension, and in some cases, the additional State Pension.
If you are on a low income, you could also qualify for the guaranteed element of Pension Credit, while those with some savings may get the savings element of this benefit. For more information about these and other benefits such as the Winter Fuel Payment, click here.

Many older couples rely on the pension income of one person - often the man. Should that person die first, the other person can therefore be left in a difficult position financially.
One way to prevent financial hardship for the surviving person is to take out a joint life annuity that will continue to pay out up to 67% of the original payments to the surviving partner should one of them die.
The disadvantage of this approach, however, is that the rate you receive will be lower. Again, the Pensions Advisory Service on 0845 601 2923 is a useful first port of call if you are unsure what to do.

Read Full Story