COMMENT
Annuity Rates Fall 40% In Ten Years

The latest Annual Annuity Review, produced by Moneyfacts, shows that annuity rates continued their decline in 2004. In fact, rates for 60 year olds have fallen by two fifths (41% for men and 39% for women) over the last ten years. This is because we are living longer and so pension pots have to be spread more thinly over a larger number of years. 

The figures in the table below are based on an average 60 year old buying a standard 'level without guarantee' annuity with a purchase price of £10k. This means income payments will be the same each year for the rest of his/her life.

Women's rates tend to be slightly worse than men's as they tend to live longer, so annuity companies have to pay out for more years.

Although rates rose a little in the first half of 2004, the year ended with rate at the lowest point seen in the whole time Moneyfacts have been compiling the review.

This is obviously a worrying trend, especially if you're due to retire soon. But there are things you can do to improve the rate that you're offered.  

1. Delay Purchasing an Annuity

The longer you can wait to retire, the bigger your pension pot should be. You'll also get a higher annuity rate as you'll be older. Methods such as income drawdown and phased retirement (find out more here) can provide you with an income before you have to purchase your annuity. However, you'll need to work out if you gain more from this route than you lose in the way of annual income from not taking your annuity earlier.   

2. Shop Around

The difference between the best and worst rates on offer for the same annuity can be as much as 16%. You don't have to buy your annuity from the same company that you have a pension with.  

3. Declare Your Lifestyle/Health Issues

How many people have 'underestimated' the number of cigarettes they smoke a day, for a health form? How about weight? Or the number of units of alcohol consumed in a week? No one wants to look unhealthy – you'd get penalised, right?  

Well, actually no, at least not where annuities are concerned! There are a number of different types of annuity available for purchase. People with health or lifestyle 'issues' may be eligible for an 'enhanced annuity', which pays out a higher rate.  

Admitting how much you smoke, for example can add between 4 and 13% to the top standard rate, depending on age and sex, as the annuity companies know you're not likely to live as long as a non-smoker. The same principle applies if you're overweight; and if you have any kind of health condition (e.g. diabetes, heart problems etc.), the increase can be greater still.

To qualify, you will generally need to undertake a medical, though sometimes a questionnaire is sufficient. In fact, it's estimated that clients who qualify for a fully underwritten impaired life annuity, could receive 50% more income, compared to the market leading standard annuity.  

So if you're approaching retirement, work out if you can afford to delay buying your annuity, make sure you shop around and don't forget to tell the truth on those forms - you'll hopefully end up with a much bigger income!

Find out more in our Pension Centre.