Don't take low rates lying down 

Annuities have collapsed, but you can improve pension income by shopping around.

Although annuity rates have risen from their nadir in recent months, they remain historically low and are still the cause of great financial hardship to those forced to buy since the beginning of this year. 

Anyone purchasing an annuity today will get roughly half what their pension fund would have bought in 1990. This is because annuity rates are tied to gilt yields, which have collapsed from 12.4 per cent in 1990 to 5.4 per cent today. 

For instance, a 65-year-old man with a £100,000 pension fund in 1990 buying an annuity with 3 per cent escalation, 50 per cent spouse's pension, payable monthly in arrears, would have received an annual income of about £10,870, compared with £5,987 today. 

Clearly, the fluctuations in gilt yields are outside your control, but it is possible to secure a better rate than that offered by your pension provider by taking the 'open market' option. This allows you to take your pension fund to any other annuity provider on the market that offers better rates. A staggering 75 per cent of people buying annuities fail to take advantage of this right to shop around so that thousands are suffering from worse rates than necessary. Rates change from week to week, so seek advice from one of the handful of specialists who update their databases every week. 

An annuity purchase is for life, and with increased longevity, this means making a decision that will affect your retirement income for the next 20 to 30 years. Annuity Direct managing director Stuart Bayliss says: 'The difference between the top and bottom rates can be up to 28 per cent. Even between the top company and the fifteenth best company, a 10 per cent to 12 per cent gap is common, whereas a few years ago the spread between the top providers was only 5 per cent. This reflects a trend for annuity providers to move aggressively in and out of the market and cherry-pick the types and classes of business they want.' 

For instance, in mid-October a man aged 65 with a £10,000 fund, buying a single-life level annuity guaranteed for five years, would receive an annual income from the top four providers of £918 (Legal & General), £908 (Standard Life), £860 (Norwich Union) and £837 (Prudential). The lowest rate on offer was Royal Liver, which offered £805. 

These figures show that even among top providers, there is room for improvement. But the providers offering the best rates for single-life annuities are not necessarily the best for other types. On a joint-life annuity for the same 65-year-old man with a £10,000 fund, Standard Life and Prudential's rates could be improved by 7 per cent, whereas Norwich Union would have been top. By contrast, Prudential and Standard Life often provide the best rates for escalating and RPI-linked annuities. (An escalating annuity provides an income rising each year by a fixed percentage, usually from 1 to 5 per cent, and RPI-linked annuities increase in line with inflation). 

'There is an enormous danger that people will assume that, just because their pension provider is top of the "best buy" tables for, say, single-life annuities, that it will also be the best for other types of annuity. This is hardly ever the case in my experience,' says Bayliss. 
Another factor to consider before taking the best open-market rate is whether your pension contract incorporates a guaranteed annuity option. Although Equitable Life, Scottish Widows and MGM Assurance are reducing terminal bonuses to pay for these guarantees, most providers are honouring them in full. Because annuity rates are far lower today than they were in the 1970s and 1980s, a guaranteed rate incorporated in a contract issued then will be superior to anything on offer today. 

Those in poor health can secure improved rates by asking for an 'impaired life' annuity. The same applies to heavy smokers and the obese. 

And MGM Assurance offers a 'geo-economic' annuity for manual workers living in the North. That's known as cold comfort. 

Observer: October 31, 1999