It’s one of the most important financial decisions you’ll make, so don’t be rushed into choosing annuity rates. You really should find the best retirement option for your own set of circumstances. 

These really aren’t good times to be retired or to be about to retire. Savings rates are at historic lows with some close to 0% interest. People relying on their pensions for their retirement may have had nasty shocks as stockmarket falls resulting from the credit crunch and the recession we are witnessing have eaten into retirement savings. There seems to be little upside evident, and this is especially true for those who have actually reached retirement and are looking to exchange their pension fund for an annuity.

Annuity rates have plummeted lately, not least because of the Government’s programme of quantitative easing (QE). This process has led to a 50-year low in gilt yields. Insurance companies (annuity providers), which base their annuity rates on these gilts, have been cutting back. Figures from pension experts show that while in August last year, a male aged 65 with a pension pot of £100,000 could buy an annuity income of £7,901, today he could get only £7,067.

Accepting all this your retirement strategy must be to maximise annuity returns for your pension fund. Sadly, retirees generally spend little time choosing their pension annuity and those that get it wrong will pay dearly in terms of lost retirement income.

Annuities essentially work by exchanging pension fund money for a secure retirement income. An abundance of annuity types are around, but most experts warn against taking out a pension annuity with your pension provider. Instead, it is best to utilise the open market option and shop around for the best annuity quotes on offer from various providers.

The Financial Services Authority (FSA) states that doing this can increase your retirement income by as much as one-third. Despite this, it’s still a good idea to check the annuity rate offered by your provider and use this as a benchmark when doing your shopping around. The FSA website (www.fsa.org.uk) has useful annuity tables for comparing the various products available.

A conventional level annuity guarantees a fixed retirement income until you die. This security comes at a price, as any pension fund remaining will not be passed on to your estate upon death. Couples might decide to take out a joint life annuity. Although single life annuities do pay a higher level of income than joint life annuities, payments do stop when the planholder dies. A joint life annuity will continue to pay out an income for the remaining partner at a reduced rate which is set when the annuity is purchased.

Another annuity option that affords some protection is to add a guarantee period. This means that income payments will continue to be paid to your estate for a set period of time, even if you should die within that period. Without these add-ons, all income payments will stop upon death and the insurance company keeps the pension fund and reaps the benefits.

You can also choose to arrange your annuity so that you receive an amount that grows year on year. These escalating annuities can be arranged to increase by a fixed amount of, say, 3% per year, or by the Retail Prices Index (RPI). However, inflation-linked annuities tend to be much more expensive and start off paying a lower annuity income, typically between 30-40% less. Although RPI levels are currently negative, escalating annuities are a very useful way to combat the general trend of a rising cost of living, which can quickly erode your spending power in retirement.

An enhanced annuity or impaired life annuity are other ways to maximise retirement returns. These annuities pay a higher rate for those with medical conditions which could reduce life expectancy. For more serious medical conditions, the latter impaired life annuity might pay a considerably higher income for those individuals with a low life expectancy. Some providers, for example L&G and Norwich Union (soon to be Aviva), even offer enhanced annuity rates for inhabitants of cities and areas with lower-than-average life expectancy.

Income levels that can be taken from a with-profits annuity are linked to the ongoing performance of the insurance company’s with-profits fund. If you opt for a with-profits annuity you must set an anticipated bonus rate (ABR). This is then used to set the annuity income level. For example, Prudential recently launched their new Income Choice Annuity which allows retirees to select the income they wish to receive and then have the option of changing that income level every two years. The income is based on Prudential’s with-profits fund and so will either go up or down depending on performance. As with all with-profits annuities available on the market, if the fund suffers, payments will shrink.

Those who are willing to take chances can opt for a unit-linked annuity. These potentially offer better income returns in the long run, but management charges can be hefty and the annuity income paid is based on the moves of the stock market. A more drastic way to maximise annuity returns is to put off purchasing one until annuity rates have improved, and, of course, the older you are, the better annuity rates should be.

You could opt for short term annuities, as offered by the Canada Life AGA account. With this sort of arangement you buy a series of annuities for, say, five years, over a period of time. However, you could find even less attractive rates available when it comes time to switch.

You really should make the most of your pension arrangements and your annuity, and you’ll thank yourself later for doing so. Here are some tips on boosting your pension, following the Budget which contained a whole host of announcements affecting retirement income.

Make sure that you do get all the pensions to which you are entitled. Many people do have old pensions that they may well have forgotten about or they might have simply lost touch with. An independent financial adviser (IFA) should be able to help you find out where your pension is now, or you can use the government’s helpful Pension Tracing Service (0845 600 2537), or online at www.thepensionservice.gov.uk

You do have various retirement options, and you need to know what they are. Retirement planning is extremely complex and if you buy a pension annuity this is usually a final decision that cannot be changed. But you can now draw an income from your pension fund in several different ways. An IFA can talk you through all of the retirement options and help you decide which is the most appropriate for you.

Whether you are buying a pension annuity or thinking of another way of providing your retirement income, you will have a lot more buying power if you bring all of your pension arrangements together. You are entitled to transfer your pension fund and shop around for your the best annuity rates using the open market option (OMO).

Some personal pension plans will have guaranteed annuities written into them, guaranteeing a minimum amount or annuity rate at retirement age, and you may have a sound entitlement of which you are unaware. These guarantees can actually be lost if you do not take the option on a specific date with some providers, so it is important that you are aware of your entitlements. 

You might want to boost the value of your pension fund in the run up to retirement. You can contribute up to 100% of your earnings into a pension plan and get tax relief on the full amount. This is particularly useful if you are paying higher rate tax and you want to top up your pension. In the recent Budget, this higher rate tax relief will be curbed from April, 2011, for those whose annual income is over £150,000. Thoew with higher earnings really should explore the myriad of retirement options available.

When you do retire make sure you reduce your income tax liability as much as you can on your annuity income. For example, if you are 65 or over with taxable income below the figure of £22,900, you may be entitled to claim improved personal tax allowances to reduce the amount of income tax you pay. Married couples may well be able to improve their overall position by “equalising” ownership of joint income bearing assets to bring each of them within the income limit for those increased tax allowances.

Just a few pointers that might help you with your pension arrangements leading to that important annuity purchase. Just make sure you do eventually shop around for annuity quotes using your open market option.

Leading enhanced annuity provider, Just Retirement, has just appointed a new head of sales. As a specialist UK life assurance group with the aim of providing financial services to those at or in retirement they are keen to increase momentum in a developing market. They have announced the appointment of John Pyburn as Associate Director, IFA sales, to take immediate effect.

John has a great deal of experience within the life assurance sector having worked previously with companies such as Canada Life, Scottish Mutual and Scottish Widows in very senior sales roles. Most recently, he was Director of Business Partnerships for State Street Global Advisers where he led the  move into the Asset Gatherer market with key responsibility for building the strategy, infrastructure and implementation of that move. A bit different from the annuity market.

Commenting on his appointment, David Cooper, Just Retirement’s Marketing and Distribution Director stated that John brings a great deal of experience and knowledge to the role, and that his track record in life assurance sales is excellent while his most recent experience of building partnerships is exactly in tune with the future aims of Just Retirement.

So, comfort if needed. Just Retirement are continuing to build on their already strong position in the market, which is good to know if you are seeking annuity quotes to find the best annuity rates for your circumstances, especially if you qualify for enhanced annuity rates for reasons of ill health.

The Association of British Insurers (ABI), an umbrella body for consumers, has warned UK companies against giving substantial pay rises to employees in the run-up to retirement, which would naturally boost the value of any retirement income. A bit like having a large annuity you can top up in advance.

MM&K, the firm that prepared the survey, stated that in some cases, large pensions actually undermined the relationship of pay and performance of employees. And, according to the Pensions Policy Institute (PPI), the average occupational pension arrangement pays out a little over £5,000 a year while the average amount used to buy a pension annuity under a personal pension is around £25,000. However, the average director in the survey’s top ten had a pension fund worth about £10m, which would translate to an average annual pension payment of around £655,000.

Ordinary employees are fortunate if their employer makes a contribution of 10% of their salary to the pension fund each year. But the ten directors in this survey have an average of 3.6 times their salary added to their pension fund. Indeed, three of the bosses – Goodwin, John Watson, chief executive of  Bellway, and Tim Clarke, head of Mitchell & Butler, had more than five times their salary added to their pension pot (what a boost to annuities that would give!). Alistair Darling last week slashed tax relief on the pension contributions of high earners, cutting the tax relief for those earning more than £150,000 per year from 40% to 20%. 

One leading pensions adviser thinks it could also jeopardise the ordinary pension scheme member. Alex Waite, head of consulting at Lane Clark & Peacock, suggested that if a managing director is not personally able to gain any real benefit from participating in the company pension arrangement, it is only human nature that their attitude towards the whole pension arrangement will be affected.

Let’s look at some of these individual’s likely pension funds and pension entitlement, taking into account that they don’t have to rely on annuity rates like the rest of us. First, Fred Goodwin of RBS, increase in pension fund during 2008, £8,260,000, total annual pension accrued, £693,000. Next, David Brennan of Astra Zeneca, increase in pension fund during 2008, £4,037,000, total annual pension accrued, £611,000. Then we have Todd Stitzer of Cadbury Schweppes, increase in pension fund during 2008, £3,806,000, total annual pension accrued, £1,476,000.

What would we give for an income in retirement of only a percentage of these figures? Wouldn’t it be great when you’re looking for annuity quotes to have such a massive pension fund to play with? I suppose we should just carry on dreaming!

You should now think twice before you buy your pension annuity. Those people coming up to retirement and those pensioners of 70 plus approaching the age of 75, the cut off age beyond which they are obliged to purchase an annuity, would do well to hang on a while if they possibly can. 

It might mean deferring retirement for some individuals but experts are now suggesting that there is every chance that annuity rates will improve somewhat over the next couple of years. This is all based on the government’s admission that it will need to borrow somewhere around £220 billon to balance the books in the current year; a move that has thrown the gilt and currency markets into a mild panic. The upshot is likely to be a big jump in gilt yields as institutions, in particular foreign investors, demand a higher return for the risks they take in holding Sterling. 

Government stocks or gilts actually determine the rate paid by annuities and if gilt yields rise as expected, annuity rates will also improve.  Annuity rates have fallen a fair bit over the past few months as the returns reacted to the big cuts in the Bank Base Rate (BBR) which brought BBR down from 5% in April, 2008, to today’s level of just 0.5%.

Gilt yields did jump in reaction to the Budget and although experts have been predicting a long-term downward trend in annuity rates, it is actually a much harder call today. The quantitative easing (QE) programme has put some downward pressure on gilt yields but on the other hand the government has got to sell an awful lot of debt on which it will have to offer more attractive rates. It is difficult to make a firm call on how annuity quotes will look in the near future, especially looking at how quickly sentiment turned from concern about inflation to deep worry about deflation. However, there are some good reasons why annuity rates could rise.

Matt Trott, head of annuities LV=,  makes a similar statement suggesting that the government’s issue of £220 billion in extra gilts could definitely lead to volatility in pension annuity rates for some time to come.

Importantly, if you do need the income now, go ahead and buy an annuity, but you should make some provision for future inflation. One suggestion is that you consider splitting your annuity purchase into two with half in a level pension annuity and the other half in an index linked pension annuity.