Don’t make a mistake and find yourself with low annuity rates, possibly leaving you 20% worse off in retirement. When you reach retirement it should be a time you can look forward to when you’re finally done with the daily work grind. So, with all this extra leisure you’ll have on your hands, it’s really important your pension fund does the best for you. And there are some pretty easy ways to achieve this.

Most people, though, don’t know what is available to them. In fact, recent research from enhanced annuity provider, Just Retirement, shows three in four retirees are still missing out on vital extra income in their retirement. When you retire, you’ll probably take your benefits from your pension fund using an annuity, and this converts your pension fund into an income stream. The amount of income you’ll get depends on the size of the fund and annuity rates at that time. Now, these rates are influenced by several factors including your age and gender, as well as economic issues such as interest rates and the yield on gilts and corporate bonds. Putting it simply, the higher the rate, the better the retirement income. 

To achieve this one golden rule: you must never blindly accept the first annuity quotes your pension company offers you without shopping around for a more generous option, and this is where many people go wrong. Each annuity provider sets its own annuity rates, so it follows that some will be a lot better than others (a bit like getting motor insurance quotes). This ability to shop around is known as the open market option (OMO). 

You’ll be surprised how much difference in income using the open market option can make. For example, let’s say you’re a 65-year old male. Based on today’s annuity rates, the most competitive standard level rate for you is 6.8%, while the least competitive is a miserly 5.69%. This means, if you had a pension fund of £100,000, your retirement income could range from £6,800 a year at best down to £5,690 a year at worst. That’s a difference of £1,110 each and every year for the rest of your life. What if you live for 20 years after retiring. You would, in this example, get an extra overall income of £22,250 – or about 20% more. Quite a financial bonus in return for a few minutes of shopping around.

You might actually be able to boost your reirement income even more based on your life expectancy. If your life expectancy is lower than the average, it’s assumed that your annuity will pay out for a shorter period of time, giving you less income overall. For this reason, though, you could be compensated with better annuity rates. If you smoke regularly then you should shop around for  smoker annuity rates. Naturally, a smoker is expected to statistically have a shorter life expectancy than a non-smoker. And this is reflected in the higher smoker rates available from these specialist annuity plans. Example; the most competitive smoker rates offer a return of 7.83% (again, for a 65-year old man). This would provide an annual income of £7,830 based on a £100,000 pension fund, whereas the top standard annuity only offered an annual income of £6,800, and the worst offered a miserly annual income of £5,690.

Then we have the enhanced annuity and the impaired life annuity. These work in a similar way to smoker annuities. But this time a better rate is based on a medical condition(s). For instance, if you suffer from any of the following conditions, then an enhanced annuity could provide a much more generous income:high cholesterol or blood pressure, diabetes (insulin dependent), emphysema, stroke, or heart attack. Just Retirement has estimated that this could give you up to 33% more income than from a standard annuity.

If you’re in very poor health, and your life expectancy is really much lower than average, you should consider an impaired life annuity. With these, you could earn a much higher retirement income if you suffer from a very serious medical condition such as chronic heart disease or lung disease, some forms of cancer or, for example, motor neurone disease. This could increase your retirement income by up to 60%.

The key thing is really to shop around for annuity quotes, and to ensure any medical problems you suffer from are disclosed and taken into account. Then you really could buy yourself a much larger retirement income.

It really doesn’t pay to delay buying that annuity. Annuity rates are set to stagnate, so now may be the right time to buy. If you are about to retire shortly, a bit of good news; annuity rates have nudged upwards just a little in the last fortnight. But if you are hoping for and holding out for a big rise in rates, you may be better off forgetting that and making a move now, because some specialists reckon we will see little change in rates over the coming months.

Pension annuity rates determine the retirement income you get from a pension fund built up via a money-purchase occupational arrangement or personal pension plan. They are very heavily influenced by interest rate movements, and, as the base rate has fallen, so have these rates. Last August they were at something of a six-year high, but have since dipped by about 10%. However, this downward trend has been bucked a bit of late, with a couple of tweaks and adjustments.

What is out there? First, we have the conventional “level” annuity which pays a fixed annual income, with no increase, to the retiree until they die. If you opt for a “single life” version, the income will cease on your death and your partner gets absolutely nothing. However, a “joint life” version pays, following your death, your partner, and they get a portion of the income you were receiving.

A 65-year-old man with a fund of £100,000 could buy an annuity giving an annual income of around £7,220 from the current best annuity quotes (single life level annuity), and this is a lot more than from an inflation-proof annuity, which, whilst offering some protection against the effects of ongoing inflation, actually pays out a lot less income initially. A married couple aged 65 will get an annual income of £4,040 for each £100,000 of pension savings if they choose RPI protection, and that’s about 38% less than the £6,580 they’d get by choosing a straightforward level income.

An “escalating” annuity is a bit cheaper. These increase your income by a fixed percentage each year, usually 3% – 5%. But they are still pretty expensive. For the same married couple with a £100,000 pension fund at 65, the annuity would start at just £4,668 with a 3% guarantee. The Financial Services Authority (FSA) estimates it would take around 14 years for a 3% escalating annuity plan to catch up with the income from a level version.

New “third way” annuities offer flexibility. You choose a guaranteed minimum income level from your pension fund, but you leave the money invested, giving the chance of an improvement in value. As an example, Aegon has just launched a Secure Lifetime Income annuity. It has a maximum guarantee of 4% at 65, and could work well with larger pension pots where you can split your choices.

And there are other options. Enhanced annuity rates are available If you have a medical condition that will reduce your lifespan (such as cancer, diabetes, high blood pressure, kidney failure, multiple sclerosis or stroke), or if you take prescribed medication or smoke, and these are well worth investigating.

Now is certainly not the time to be shy when it comes to retiring and buying your annuity. We probably have millions of pension investors who have been thrown into chaos by nearly two years of stockmarket volatility, and there has never been a better or more important time for anyone coming near to retirement age to review their retirement plans. Here are some top tips: 

You should seek specialist financial advice. This is the only way to ensure that you have all the information available to make a proper informed decision on your pension plans. A suitably-qualified adviser will be able to give you advice on recent legislative changes, such as the forthcoming change in the retirement age from 50 to 55, which comes into effect in April next year.

You should obtain a state pension forecast. This will help you to plan your retirement finances and look at whether you need to save more by topping up your national insurance contributions (NIC). Your financial adviser can help you regarding this or you can contact the Pension Service direct on 0845 6060 265 for a state pension entitlement quotation.

Shop around for the best annuity rates. Most of your pension pot will be used to provide income for you in the form of an annuity. At retirement, you can transfer your pension pot to a new provider offering the best rates to suit your own circumstances. You are not obliged to draw your pension income from your current pension provider, but by using what is called the Open Market Option (OMO), you are allowed to look for the best alternative rates on the market. And, enhanced annuity rates are also available for those people who have lower than average life expectancy, perhaps because they are regular smokers or suffer from some form of ill health.

You should be prepared to take more control when it comes to addressing your retirement income requirement. Don’t think it is just about getting annuity quotes. You really owe it to yourself to do some digging around to find the best options and income available.

Lift the jobs axe for the over-65s, demands an MP’s all-party committee. They say that employers should no longer be able to just sack older workers who want to stay on at work. And, making them finish working effectively means that they have to buy a pension annuity.

The legal right that companies have to retire staff compulsorily on their 65th birthday must be abolished now to help address the deepening pensions crisis we are witnessing, a parliamentary investigation has concluded. A new report into pensioner poverty by an all-party group of MP’s  recommends that older people should be able to continue working full time or part-time into their 70s, 80s or even their 90s so long as they are both fit and able to do so.

These recommendations, coming from the Commons work and pensions select committee, to be published in July, are a response to fears that many of the next generation of retirees could end their retirement years in poverty after being forced out of work at 65 with pension funds that have plummeted in value. For those approaching retirement today, the financial crisis and recession have left them with potential pension annuity incomes of some 20% less than would have been the case only twelve months ago and with people having no right to carry on working to make up the difference in income.

The committee’s conclusions will be fiercely resisted by business leaders who are determined to retain their right to shed staff at age 65 and replace them, where appropriate, with younger, cheaper workers. Last night the committee’s chairman, the Labour MP Terry Rooney, said the government had to recognise that the current law not only discriminated against these older workers, but also risked making the pension crisis even worse. There are an increasing number of people now reaching pension age who are finding that their pension funds are nothing like as big as they expected them to be, and they will get to a situation where their employer is able to sack them at age 65 and no other employer will take them on.

The need for some urgent action on pensions was highlighted last week by a series of alarming new reports about the state of the pensions industry. A survey of 1,000 blue-chip companies by PricewaterhouseCoopers (PwC) found that 96% believed their final salary arrangements were unsustainable. At the same time, the Organisation for Economic Co-operation and Development (OECD) put Britain at the bottom of a league table of what those people coming up to retirement can expect in terms of retirement income.

The Department for Work and Pensions (DWP) has said that it would not review the compulsory retirement age until 2011, but this is a date that campaigners say will be too late for the 25,000 or so people forced to retire against their will each and every year. Already ministers have announced that the retirement age will actually be increased in phases to 68 by 2048. At the moment, a UK employer can dismiss a member of staff without any redundancy payments on his or her 65th birthday. Employees do, though, have a right to request to work beyond age 65, but employers have only to “consider” the request.

In 2006, the charity, Age Concern, applied to the high court arguing that these age 65 rules were illegal. Its case was referred to the European Court of Justice, which ruled in March this year that compulsory retirement at age 65 was not in breach of EU law so long as the UK government was able to justify it. It will now be up to the high court to determine later this year whether the rules are “legitimate” or not.

Independent pension expert, Dr Ros Altmann, has said that the financial crisis we are witnessing meant that people now approaching retirement were doing so with their pension and other assets down in value, annuity rates falling, and government policies working against them. She stated that if people wanted to supplement a disappointing annuity income with some part-time work, current policies actually penalise you from doing so, both through age discrimination legislation and the UK pension credit system.

I was in the pub yesterday (it’s the hot weather, you know), and I overheard an older gentleman talking to his mate, and he asked him: I’m 74 now and have a personal pension fund valued at about £20,000. My pension provider says that when I reach age 75, not far off,  I will have to purchase a pension annuity. Do I have to do this?

I didn’t butt in with an answer but here it is: pension rules state that you must commence drawing an income from your pension funds by your 75th birthday. As well as using it to buy a lifetime annuity, which provides a guaranteed income in retirement, your money could remain invested through an Alternatively Secured Pension (ASP) from which you must draw an income. However, for someone with a solitary pension fund of around £20,000, an ASP is too expensive to run and will also too much investment risk. The good news is that most personal pension plans offer an open market option. This lets you shop around to find the best annuity rates for your circumstances.

For example, an impaired life annuity or an enhanced annuity might pay you a higher income based on your stste of health, where you live or if you are a regular smoker. you should use the open market option to maximise the income you get from your pension fund. Even if you don’t suffer from ill health you could still get 15%-25% more retirement income due to the large difference between the worst and the best annuity rates.