Over 725,000 people will retire this year, and more than half of them will be at risk of making the most serious retirement mistake. It could leave them thousands of pounds worse off every year, and struggling to make ends meet when they should be able to relax after a lifetime of work.
So what is this mistake, and why is it so serious?
The mistakeThe error in question is buying the wrong annuity - which turns the lump sum from a defined contribution, money purchase or stakeholder pension into a monthly income. More than 400,000 of them are bought each year, and according to a study by Partnership, only 13% of people know that annuity rates vary between providers.
A new tool from the Association of British Insurers has revealed just how dramatically the rates on offer vary.
The differenceThere's an astonishing 31% difference between the best and worst annuity rates. Even more shockingly, they show that the difference between the best and worst enhanced annuity rates (which are available to people with a number of common medical conditions) is 46%.
On conventional annuities, Reliance Mutual offers the top rate and Scottish Widows offers the lowest, according to the ABI (based on a level annuity for a 65 year old man, living in the Manchester area).
For enhanced annuities, Prudential offers the top rate and Friends Life offers the lowest, according to the ABI (based on a level annuity for a 65 year old man, living in the Manchester area, who smokes and has lung disease).
Khalaf says: "On a purchase price of £18,000 this means the difference between receiving £1,778 a year and £1,214 a year. Over a 25 year retirement that would be an extra £14,100 income paid out."
Shopping aroundIt goes to show how vital it is to shop around - and it needn't be difficult. You have the option of doing it yourself.
Alternatively, you can approach a financial adviser who can do it for you. They will charge a fee, but it's likely to be a fraction of the money you could lose out on by failing to shop around for the best annuity, and they can talk to you about the alternatives to a conventional annuity too.
Free annuity calculator
Enhanced ratesWhile you're checking the market, it's important to consider whether you qualify for an enhanced annuity. According to MGM Advantage, an estimated 70% of people could qualify for an enhanced annuity, while according to Partnership just 4% of people take them out.
They found that the top five most common conditions that qualify people for an enhanced rate are: diabetes, cancers, strokes, high blood pressure and chronic obstructive pulmonary disease, whilst top lifestyle conditions include smoking and diabetes.
Anyone with any of these conditions or lifestyle factors could get a rate that's 25% better than a conventional annuity, while some things could bump up the income even more. According to MGM Advantage a healthy man, aged 65, with a £100,000 pension fund could receive £6,106 a year in income. If this man was a smoker with high blood pressure, the annual income would increase to £7,115. If the same man had diabetes with high blood pressure and high cholesterol, the annual income would increase to £7,843.
It may seem daunting to start shopping around at the point when you retire, but clearly you could end up losing tens of thousands of pounds over the course of your retirement if you don't - which is a spectacularly expensive mistake to make.