2012 was a rotten year to retire. If you were looking to convert a pension pot into a regular income you were probably very disappointed by any quotes you received. This would have been especially true if you went for an annuity, the most common vehicle for securing a retirement income. (Read about annuities in Become a pension expert in five days.)
Annuity rates have been falling for a long time now, and the falls were particularly large last year. In fact, the average new annuity for a 65-year old male fell by 11.5% in 2012, according to Moneyfacts. That was the largest annual fall since 1998 when annuity income fell by an average of 13.7%.
Look at this table:
Average annual change in annuity income for 65-year old man
|
Calendar year |
Average annual change in annuity income |
|
1998 |
-13.7% |
|
1999 |
1.8% |
|
2000 |
-0.8% |
|
2001 |
-6.0% |
|
2002 |
-11.1% |
|
2003 |
-2.3% |
|
2004 |
-2.5% |
|
2005 |
-3.0% |
|
2006 |
1.3% |
|
2007 |
4.4% |
|
2008 |
-2.2% |
|
2009 |
-8.7% |
|
2010 |
-2.7% |
|
2011 |
-8.4% |
|
2012 |
-11.5% |
Source: Investment Life and Pensions Moneyfacts
These numbers are particularly depressing when you remember that an annuity purchase is normally a once-in-a-lifetime-event. Once you’ve bought your annuity, you’re locked into it for the rest of your life, so buying when rates are low can be very painful indeed.
On a slightly happier note, annuity rates for women didn’t fall quite so dramatically last year. The average annuity rate for a 65-year old female only fell by 6.1% in 2012 – largely thanks to the new EU gender directive coming into force.
Get the best deal
So if you’re planning to buy an annuity in 2013, what can you do to get the highest possible income?
1. Shop around
It’s essential that you don’t take the first annuity you’re offered. Make sure you shop around all the annuity providers and get the best possible rate. Our annuity calculator is a great place to start.
Also if you’re unsure about some of the terminology – such as ‘level annuity’ and ‘guarantee’, check out our article How to buy the right annuity.
2. Be open about your medical conditions
If your health is less than perfect or you have any lifestyle issues that could affect your health – such as smoking, heavy drinking, or even snoring – make sure you tell your annuity provider. If the provider thinks you’re likely to die at a relatively young age, they’ll be willing to pay you a higher annuity. Read more in When you’re better off sick.
3. Combine your pension pots
Many people have more than one pension pot. You might have built up a pension pot worth £20,000 from one job and £12,000 from another job.
[SPOTLIGHT]If you’re in this situation, it’s probably best to combine your pots together when you purchase an annuity. If you have a bigger sum of money to play with, you’ll probably get a slightly higher annuity rate.
4. Delay your purchase
You might be able to delay your annuity purchase if you can carry on working later or you have other sources of income to live on.
As you get older you should be offered higher annuity rates as you’ll live for a shorter period, so you’d normally expect to be offered a higher rate in 2016 than in 2013.
However, I have to add a caveat on that. The main driver for annuity rates is long-term gilt prices. Gilts are extremely expensive at the moment – that’s the main reason annuity rates are so low – and the price of gilts will inevitably fall at some point.
But there are no guarantees as to when that will happen, and you can’t completely rule out yet further falls in annuity rates in the near future. Read more in Annuity meltdown will eventually end.
5. Look at alternatives
The main alternative to an annuity is income drawdown. With drawdown, you have more flexibility and you’re not locked into the same annuity for the rest of your life.
However, drawdown is more risky than an annuity as you may end up with a lower income if things don’t go well in the future. Drawdown is also more expensive so it’s not really appropriate for anyone with a pension pot smaller than £100,000.
Another option is a fixed-term annuity – this is essentially a hybrid between an annuity and drawdown. You use some of your pension pot to buy an annuity that lasts for, say, five years. Then when the fixed term is up, you can use the rest of your pot to buy a larger annuity (hopefully.)
6. Advice
You may also benefit from getting some advice from a professional. Then you can be sure you won’t be missing out on the best deal. Three well-known players in this area are Annuity Direct, William Burrows and Hargreaves Lansdown.
More on pensions and annuities
How the gender directive has affected annuities
Annuity mess cuts average pension by 30%
What’s wrong with income drawdown?
How often should you review your pension?
Workplace pensions: what it means for you