How to Find the Best Annuity Rates for Your Retirement

What You Need to Know

1. Annuities are generally provided by insurance companies and are designed to supply you with an income after you've retired.
2. There can be huge differences in the level income offered by different annuities.
3. Men traditionally received better rates due to having lower life expectancy, but thanks to new EU legislation this is no longer the case.
4. Your age, health, post code and the value of gilt bonds will all go towards the rate you are offered.
5. The recent climate of economic uncertainty has pushed up the price of gilt bonds and consequently reduced annuity rates.
6. To ensure you’re making adequate provisions for later life it’s best to talk to an independent financial advisor.

There is a substantial difference in the size of income that the best and worst annuity rates pay out. As such, it’s crucially important that you secure the best rate available to you for your pension pot as once you've made your choice you can’t go back on it.

What is a Pension Annuity?

An annuity is a type of financial product that provides you with a regular monthly income in exchange for your pension pot when you retire.

Annuities are typical provided by insurance companies. Some of the leading UK providers include Aviva, AXA, L&G, Scottish Widows, Prudential and Standard Life.

As with any form of insurance product, the provider will make calculations as to how much money they will need to pay out and offer a rate accordingly. One of the biggest factors here is your life expectancy as the longer it is, the more regular payments that the provider must make.

This is the reason that, until very recent EU legislation that ruled annuity rates cannot be gender bias, women generally got lower rates as they typically live longer than men.

Pension annuities used to be compulsory in the UK for all by the age of 75. However, since spring 2011 this deadline has been removed, which allows you to be more flexible and choose when you feel is a good time to buy an annuity. This change also opened up other options such as income drawdown.

What affects the annuity rate I am offered by pension providers?

• Your Age: All other aspects being equal, the older you are the higher the rate you will be offered.
• Your Health: If you have any health conditions, are overweight or are a smoker, you may qualify for an enhanced annuity which will give you a higher monthly income.
• Your Life Expectancy: This is the biggest factor affecting the rate you receive.
• Your Postcode:
Providers are using postcode information as part of their evaluation process to predict life expectancy.
• Government Gilt Returns: These are investments that are held by pension providers and affect the annuity rates they offer. Higher returns generally mean better rates.

Annuity Rates are at Historic Lows

Annuity rates have been declining for two decades because of extending life expectancies. Since 2007’s economic downturn, however, the situation for retirees has been made more bleak.

With the volatility of stock markets in recent years there has been increased demand for government gilt bonds, seen as a safety bet in uncertain conditions. This has meant that gilt prices have risen leading to proportionately smaller returns. This is bad news for retirees and means incomes are lower now than pre-credit crunch.

Retirees have been further hit by the economic uncertainty in the eurozone which has put the squeeze on UK annuity rates.

The Golden Mantra: Shop Around for the Best Annuity Rates

Whilst the annuities market is struggling there is still value to be found for retirees. The key is to speak to an IFA and shop around for the best annuity rates on the open market. Options such as enhanced annuities and drawdown can be very attractive.

Market Unlikely to Change Soon

A key takeaway here is that experts are not predicting any sizeable increases in annuity rates in 2013. As such, taking the approaching of doing nothing in the hope that the market may pick up soon is not advised.

A far wiser solution is to speak to an independent financial advisor.

Importance of Using an IFA

This is critically important. The only way to ensure you get the best options in retirement for your is by speaking to a qualified independent financial advisor (IFA). Emphasis being on independent here, as IFAs are required by law to advise you to the best option for your needs, regardless of commission or provider bias.

It is important to understand that there are never one-size-fits-all best solutions when it comes to retirement planning. Every retiree has a highly individualized set of needs and circumstances that must be fully considered when choosing an annuity.

Remember, once you make your choice here, there is no changing it.