It is an interesting question, what happens to your pension annuity, your retirement income, if you die early in retirement, or if you die before reaching retirement. Different pension schemes have different rules on this issue.

Final salary pensions, sometimes called defined benefit schemes, are the top tier of company pension schemes. Sadly, these schemes are not as common these days as they used to be. Few new employees will be offered them these days. If you die before drawing your pension, most schemes will pay up to a maximum two-thirds of the likely pension you would have got if you had worked with the company until retirement. Many will also pay a death-in-service benefit to a maximum of four times your annual salary.

These payments can go to your husband, wife, any dependent children, or nominated beneficiaries. Scheme rules do vary, though.

These days, most employees are now in money-purchase, or defined contribution, pension schemes, and will use their pension pot when they retire to purchase a pension annuity. You might die before getting that far. If so, your scheme should return the value of your fund at time of death, including employer contributions, tax relief and any growth. Some employers may also offer death-in-service benefits as well.

Premature death with stakeholder and personal pensions…once again, you get your money back, or rather your survivors do, in the form of a lump sum known as “return of fund”. This will include all your contributions, tax relief and any growth. The same goes for members of group personal pensions.

With state pensions, if you’re single, your state pension dies with you. If you are married, and your partner is over 45, they may be able to claim a £2,000 refund lump sum, then the full basic state pension for up to 52 weeks, currently £90.70 a week.

If you’re simply cohabiting, your partner won’t get a penny. This spells disaster for couples who have lived together for years, only for the main breadwinner to die young.

There are some things you should consider doing, regardless of the type of pension scheme you have. When you take out a scheme, you should make an expression of wish, setting out your beneficiaries.

You should also consider writing your plan into trust, setting out exactly who you want to get the money. If you don’t, any payout could end up being decided by probate, which, as we all know, could take months. You should also write a will (and keep it updated), to make sure your wishes are clear and legally enforceable.

The best thing you can do if in doubt is to seek professional advice. Premature death, whether before drawing your pension annuity or after, is a major financial issue. Maybe not for you, but for your dear ones you leave behind.

That’s right, live in the wrong place with the wrong postcode, and your pension annuity could be less. Your postcode can affect your pocket in some less obvious ways. Companies are increasingly using precisely where you live in the country to pigeonhole you and your lifestyle, using the information to determine how much you will pay for everything from your house insurance to your pension annuity.

They claim this makes the assessment of risk more accurate, and premiums cheaper for everyone, but if you don’t fit the profile or you fall on the boundary you could end up losing out, and quite heavily. This can be seen quite clearly with car insurance and proximity to city centres. 

The theory is that the more affluent you and your neighbourhood are, the longer you live. Glaswegians have an average life expectancy in their early sixties, while people living in Surrey will on average live well into their eighties. The rub is, whilst that is good for the individual living longer with the pension annuity, the more expensive your pension annuity is for the insurance company paying your income in retirement, as it will be paying out for longer. And in recent years, some insurance companies have started taking account of customers’ postcodes when deciding what annuity rate to pay them.

Prudential, a major player in the pension annuity market, argues that the assessment is based on your full postcode, which refers to an average of 14 houses on a street or within a few square miles, but the data about the health and wellbeing of those residents is based only on its existing client base, not the population as a whole.

“Using your postcode to help determine how much you get in retirement seems to be a creeping policy,” says Tony Attubato, from The Pensions Advisory Service. “This is understandable when you consider that Glaswegians typically live to their late sixties whereas those on the south coast often live into their early 80s. But surely a customer’s individual lifestyle and medical situation should determine that risk without taking into account the irrelevant health of those living around them? The difference between annuity rates is significant and those approaching retirement really must shop around for the best rate for their pension pot.”

Therein lies the message. Yes, your postcode can now have an effect on the pension annuity rate you are offered, but there are other important factors which could entitle you to a higher annuity rate; you might smoke, or you might have a condition entitling you to an enhanced annuity or an impaired life annuity. So, shop around.

The open market option is applicable to retirees with a pension fund to be used to buy a pension annuity. It allows them to shop around for the best annuity rates from all annuity providers in the market. This is best done via a ‘middle man’, an independent financial adviser (IFA).

Results of the Financial Services Authority’s (FSA) thematic work on open market options is a step in the right direction, but the message must be stronger if consumers are to benefit from the highest level of retirement income, their pension annuity income, when they come to retire.

Literature from life companies is unclear regarding the open market option. Consumers should be in no doubt that they have a choice of pension annuity providers and therefore a choice of annuity rates and how much they could increase their retirement income. One option is to force life companies to include open market pension annuity rates on the quote allowing clients to compare differences in income.

The open market opition should be up front and in bold. Some documentation is so unclear it probably doesn’t meet the FSA’s Treating Customers Fairly (TCF) initiative. Factors such as health or even where the client lives (postcode rated pension annuities) must be considered. Impaired life annuities or enhanced annuities can significantly increase income. There are other things to consider such as death guarantees, inflation increases and widows pensions.

Only by taking independent financial advice will a person on the point of retirement be sure they are making the right decision and receiving the best available income. So make sure you take proper advice when purchasing your pension annuity.

An interesting statistic: only 13% of people over age 50 who have consulted a professional for financial advice purposes discussed pension annuities, equating to just over half a million people. However, research from LV=, a leading player in the pension annuity market, shows that access to specialist financial advice can have huge benefits when it comes to purchasing a pension annuity.

In 2006 413,013 consumers purchased a conventional annuity. Some 40% of consumers buying a pension annuity could qualify for some form of enhancement, meaning over 165,000 people could have benefited from an enhanced annuity. The number of people who bought an enhanced annuity in 2006 was 22,686. Therefore, over 142,500 people could be missing out on additional retirement income because they have not purchased an enhanced annuity even though they may have qualified for one.

It is estimated that over £53m of pension annuity income each year is being missed out on by consumers who have not purchased an enhanced annuity (figures based on the amount of people who purchased pension annuities in 2006, sources: ABI, Watson Wyatt, FSA, LV= calculations). This is clearly a huge amount of extra income which would go a long way to assisting people’s retirement wealth.

People’s awareness of their right to purchase their pension annuity via the open market option is increasing, and tools such as the FSA’s Money Made Clear initiative is clearly contributing to this. However, it seems as though consumers are still not sure how to use their open market option, and they would like to shop around, but are not sure how to go about it.

For people facing retirement, help and advice on how to maximise their wealth and income in retirement is key, especially in the current climate. The industry needs to work with this audience and direct them to professional independent financial advice sources to help them achieve what is readily available.

When it comes to the time to buy your pension annuity at retirement-when you turn your pension fund into an income for the rest of your life-you really have to be careful and make the right decision. Getting the right pension annuity rate with the right options is crucial; your decision remains with you for the rest of your life. It’s also a one-way journey - once you’ve signed up to your pension annuity and handed over funds, you can’t change your mind or have your money back.

60 % of pension annuity buyers give it less thought than a mobile phone contract. They just agree to whatever their pension fund provider puts in front of them. Research by the Financial Services Authority (FSA), reveals a 20% gap between the best and worst pension annuities. So spend time finding what’s right for you - you could spend the rest of your life regretting a wrong decision.

When you approach retirement your pension provider will invite you to convert savings into a regular income for life at its own pension annuity rates. But these are unlikely to be table topping, so ignore this. Instead, insist on the “open market option” (OMO) which means you can source your pension annuity from the best provider on the market. This costs nothing to use and could net big increases for the rest of your life.

It’s also very important to shop around if your life expectancy is likely to be curtailed. 40 % of all pension annuity buyers could get more if they opted for an impaired life annuity plan or an enhanced annuity plan, yet only 8% have done so.