Get the best annuity rates

Public sector pension strikes, inflation at 5% and annuity rates falling to new record lows. Find out how to get the best annuity rates so you don't miss out!

Pensions have been a hot topic in my house of late. As my wife is a teacher, she is being lobbied by her Union to go on strike in response to government plans to revamp public sector pensions.

All sorts of unions, from teaching ones to Unison and GMB, have balloted their members on whether to strike, and so far industrial action is winning the day. But it’s not just public sector workers who are facing upheaval in their pensions. We are all just a matter of months away from the biggest revolution in pension saving possibly in history, in the form of auto-enrolment, an initiative designed to get us all saving for our retirements.

And chances are we need all the help we can get, as there’s never been a worse time to retire than right now.

Annuity rates falling, again

When the time comes to retire, the idea is that you take your pension pot, which you’ve been squirreling cash into over the course of your working life, and buy an annuity with it. The annuity will then pay you effectively an annual salary for the rest of your life.

The trouble is that the return you can get from an annuity has been falling for some time. And it doesn’t seem to be showing much sign of ever, truly, slowing down.

According to the latest stats from the Alexander Forbes Annuity Bureau, the rates on offer continue to make for grim reading, with large falls in standard annuity rates for three straight months now. Even those who want to protect the value of their cash a little bit by going with an inflation-linked annuity face a mixed bag, with most of the top annuities on offer having their rates cut.

It’s reached the stage where Hargreaves Lansdown now maintains that annuity payouts are at an all-time low.

Beware the impact of inflation on annuity rates

When picking an annuity, it pays to bear in mind not just what your money is worth today, but what it may be worth in ten or 20 years’ time, depending on the effects of inflation.

A study by Standard Life last month looked at how the value of your cash can be eroded away by inflation, and it made for some eye-opening reading. A pensioner who retired at 60 in 1981 would have seen the purchasing power of a £10,000-a-year level pension income fall to just £3,207 today.

And in the current climate, inflation is even more punishing for older people, with the effective rate of inflation they experience significantly higher than the headline rate. A couple of months ago the average over-55 was shelling out an additional £984.28 compared to the population as a whole due to inflation.

That’s because older people aren’t enjoying the benefits of things like low interest rates, but are instead getting walloped extra hard by energy price rises (as older people tend to use more energy than the rest of us). For more on the added impact of inflation on older people, check out this video from Age UK.

So when the time comes to buy your annuity, don’t automatically sign up for the deal paying you the most money initially – you could have decades of retirement ahead of you, and you don’t want to spend those years struggling to get by.

How to get the best annuity rate

So rates are going down, and picking the wrong annuity could see the value of your money plummet in years to come. Cheery stuff.

But there are some simple steps you can take to ensure that you get the best possible income in retirement.

1) Shop around for the most competitive annuity rates

It’s an absolute scandal that shopping around for an annuity is not the default method. Many pensioners simply accept the annuity offer from the insurer they have invested their money with, as there is nowhere near enough understanding of the Open Market Option, where you can shop around for a more competitive deal.

Doing this can boost your pension by 20%, as simple as that! Why not make use of lovemoney.com’s annuity calculator in order to see just how much you can expect to get?

2) Be honest about medical issues

When it comes to annuities, it’s actually not a bad thing for your health to be less than perfect. If you have some sort of health issue, be sure to declare it as you may qualify for an enhanced annuity, meaning you’ll enjoy a larger income. This could boost your annuity rate by as much as a whopping 40%!

3) Go for an innovative annuity rate

You only get one shot at buying an annuity. Or at least, that was the case, before the advent of fixed-term annuities. With these annuities, you use a portion of your pot to buy an annuity for a shorter term, say five or ten years. At the end of the fixed term, you can use the rest of your pot to buy a traditional annuity.

This way you can put the decision off while annuity rates are so low, in the hope that at the end of your fixed term the rates on offer will be better. What’s more, as you get older, there’s an increased chance of your health deteriorating, enabling you to nab an enhanced annuity. For more on fixed-term annuities, check out How to combat falling annuity rates.