Many people approaching retirement are really in the dark over what income to expect from their pension annuity when they retire, and many have heavily inflated expectations of what they might get.

Research conducted amongst those approaching retirement showed that there is a drastic lack of preparation when it comes to retirement planning.

Around half of those in the research planning to retire within the next five years have no idea of the annuity income they will receive from their company money purchase scheme and a further third of personal pension savers are also unable to estimate how much a pension annuity will pay out. Those who can make an estimate are wildly over-optimistic.

Almost one in five who are retiring in the coming five years are expecting that their pension annuity will provide an income of more than £9,000 a year – with a £100,000 pension fund pot. Currently, this is more likely to be around £7,700 for a man aged 65, and £6,700 for a woman aged 60. Quite big differences!

Those people who are five years from retirement should be starting to think hard about their retirement income and should check out what that income will be. Experts are predicting that annuity rates will drop as interest rates drop and stock market volatility continues.

The further away from state pension age people are, the higher their expectations of the likely annuity payout from a £100,000 pension pot. The average 60-year-old man apparently expects an average income of £8,541 while the average 56-year-old woman expects an income of £8,570.

If you have time to go to retirement, start planning now. Get some annuity quotes today so you have a rough idea of what to expect, and don’t be caught out.

People are starting to say that tomorrow’s pensioners will pay for today’s banks’ bailout.

The government is borrowing heavily to finance the bailout of the banks plus any tax giveaways. This will be done by them issuing a large number of government bonds, known as gilts, and this has a potential knock-on effect for long-term interest rates, which could be bad news for people buying pension annuities.

Insurance companies mainly hold gilts to match their annuity liabilities. Gilt yields have been falling over the past twenty years or so as inflation has dropped and longevity has increased. Annuity rates have been at a 6 year high recently but we have a big fear now of falling prices and falling interest rates, possibly deflation.

Not all annuity providers rely solely on gilts, however, and it is not unusual for insurers to hold a proportion of corporate bonds as well. These have a similar structure to government gilts although they are more risky as there is the potential that companies are more likely to go bankrupt. Some annuity providers hold property assets as well, although that obviously also carries risks. The United Kingdom Government has never defaulted on a government security.

The level of issues of gilts in the current fiscal year is expected to rise to around £110bn, which is almost double the level in the last fiscal year. A retiree with a money purchase pension pot with a high exposure to fixed income securities such as gilts or corporate bonds may do quite well over the next couple of years, as short-term demand will push prices up. On the flipside, the yields will fall, as these are fixed-income securities, and as they do pension annuity rates will follow suit.

Those with the biggest potential problem as they approach retirement are those in money purchase schemes, especially those who are due to retire within the next two years. Some may face a double problem with a downturn in their fund values and falling pension annuity rates. Equity markets will recover, but the big question is when?

You could delay retirement if you can afford to and have savings to live off. Otherwise, you ought to take advice on how best to combine your pension and non-pension assets.

You might fare better by switching to a more flexible pension arrangement, such as a phased drawdown plan, that will allow benefits to be drawn gradually whilst delaying the purchase of an annuity.

As ever, specialist advice is essential.

There are calls for life offices to renew their efforts regarding the open market option (OMO), the right you have at retirement to shop around with your pension pot to find the best annuity rates.

In an update of the Treasury’s review of the OMO, it says it will continue to monitor ongoing progress in the operation of the OMO. With reference to the Financial Services Authority’s (FSA) open market option review earlier this year which found 30% of retirees buying a pension annuity were unaware of the option, the report stated that life offices must renew their efforts to ensure that those people approaching the time to buy an annuity aware of the OMO and sources of information to help them make an informed choice.

The Treasury did acknowledge that the Association of British Insurers (ABI) was working with life offices to promote customer awareness and improve their pre-retirement wake-up letters. It said it was important that people coming up to retirement understood the importance of buying the right annuity product and how they could shop around for the best annuity rate, and it wanted the process of switching providers to be made as quick and easy as possible.

Rachel Vahey, from Aegon Scottish Equitable, has stated that there have been improvements in the pensions industry regarding this matter in both committing to raise awareness of the benefits of shopping around for the best annuity rates and in making pension transfers faster and simpler. 

Having said this, there is still more to be done.

This is a rarity; a new pension annuity provider. Hodge Lifetime launches a guaranteed annuity product. They previously offered only equity release plans.

Their annuity will be available through the specialist online portal Annuity Marketing Services. Applications and quotations for the annuity product will be available online, with quoted rates guaranteed for 14 days. They have a minimum amount of £10,000 rising to a maximum pension pot of £100,000, and up to three funds can be combined for the purchase providing the total meets the overall fund requirements.

The launch of the new guaranteed pension annuity is the first product outside of their equity release offering. They hope to satisfy demanding advisers with clear and open product presentation, competitive annuity rates, efficient application process and fast and secure administration. 

Hodge Lifetime’s use of technology takes them to the forefront of efficiency and service and they are clearly committed to developing their offering over time.

You do have options with your pension annuity purchase when you retire. It is likely that your income needs are going to fluctuate over the next few years and, when you retire, your household income will drop.

And, when you retire what about risk-taking? Probably not with the state of the markets at present.

What about your state of health? Might you qualify for increased annuity rates via an enhanced annuity or an impaired life annuity? These things need to be considered, especially when you are planning your retirement finances.

We have an issue with longevity; people are living longer these days, but they don’t always spend that time in good health. If you were to get ill later on in retirement, you could end up qualifying for enhanced annuity rates then. It’s a big consideration for people in their 50s and 60s now who are thinking about buying a pension annuity. Very often they will be in good health and so will be offered ‘healthy life’ rates.

Your health could deteriorate later on in retirement? You can’t go back and re-negotiate your pension annuity terms. If you are concerned about this you could consider fixed term annuities. These plans offer a guaranteed fixed-term income and a guaranteed return at the end of the plan term. Unlike a lifetime annuity, you are not tied in so you can look around at other options at a later date when the plan comes to an end. You can also choose your annuity income level at outset, between £0 and the maximum allowed by current legislation. This is around 20% higher than a typical lifetime annuity rate.

So, it goes to show, there are options around. For a more comprehensive analysis seek advice.