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Getting the best annuity you can buy

If you have a defined contribution (DC) money purchase company pension or any kind of personal pension, then once you have taken whatever PCLS you intend to take from your pension fund, you may purchase an annuity on retirement but are not obliged to do so. Such an annuity will provide you with an income for life, which is paid by an insurance company in return for handing over your pension fund.

Annuities may be taken in different forms: on a single life, joint life, escalating (increasing with earnings) or inflation-linked basis (rising in line with the Retail Price Index or Consumer Price Index.) Plan carefully, because the decision to purchase an annuity is not easily reversible - once you have bought an annuity, it is for life and you may not change your mind and switch to a different provider later. The level of income you receive will depend on a number of factors including: your age, sex, life expectancy, state of health, where you live and prevailing annuity rates.

Annuity rates are generally quoted as percentages. Thus an annuity offering a rate of 7% would mean that to create an annual income of £7,000 you would need to have a pension fund worth £100,000. The income you will receive from your annuity will be based on the return available from gilts (government bonds). The problem for potential annuity purchasers is that when interest rates and inflation are low, gilt yields tend to be low too.

You may be able to put off purchasing an annuity but even if you can't or won't or don't want to, that doesn't mean you cannot get the best deal you possibly can. You are not obliged to purchase your annuity from the institution that has managed your pension funds. You may shop around by using what is called "the open market option". This allows you to take your pension fund to any annuity provider in the market to get a better deal for yourself.

Annuity rates change from week to week and certain individuals can get better rates because of special factors. For example, if you have a life reducing medical condition, you can get better rates by buying an "impaired life annuity" because of your shortened life expectancy. The same applies to smokers, the seriously obese, and even those who have worked in a manual occupation and lived in the North of the UK all their lives.