7 top ways to boost your pension!

Find out how to ensure you get a higher income when you come to retire.

If you're on the verge of retiring, appallingly low annuity rates are one of the biggest problems facing you right now. Annuities convert your pension fund into an income, so when annuity rates drop, the amount of income you'll get will be lower.  

An all-time low

Research from lovemoney.com partner, Moneyfacts has revealed that, after holding steady over the summer, annuity rates have fallen to an all-time low. This is partly down to gilt yields which are still significantly lower than last year. Among other assets, annuity companies rely on the returns from gilts to fund annuities. So when gilt yields are low, as they are now, annuity rates will suffer.

But how much damage has this done in practice?

Well, the average annuity for men is down more than 10% on a year ago, while annuities for women have dropped almost 11%. The long-term picture is even more dismal with annuities providing around 40% less income than they were 15 years ago.

This is not good news at all.

Top annuity rates

So let's take a look at where the best rates stand today:

As the table shows, the highest standard annuity a man age 65 can hope for right now is 6.63%. If he had a pension pot worth £50,000 he would receive a yearly income of around £3,315. This income is guaranteed to pay out for five years whether he survives that long after retiring or not.

On other hand, if he wanted his income to keep pace with inflation, an RPI-linked annuity would provide a lower initial payout of £2,090 based on a rate of 4.18%.

And for a 65-year old women, the best standard annuity would provide an annual income of just £3,095 (based on a rate of 6.19%) while the index-linked version would pay out less than £2,000 in the first year.

Annuities are most definitely not offering good value for money at the moment, but are there any decent alternatives?

How to make the most of your pension

Thankfully, there are ways you can get round the problem of compulsory annuity purchase. Here's a few of my top tips:

1. Adopt our Get ready to retire goal - This goal will give you all the advice you need to help you make the right decisions at retirement including when and how to take pension benefits. You should also check out our video Prepare now for your twilight years! for your views on whether the State pension is generous enough.

2. Take tax-free cash now but defer your pension - Pension rules allow you to take up to 25% of your pension pot as a tax-free cash lump sum. If you can afford it, take the cash now, leaving the remaining three quarters of your pension invested. That way there's a chance your fund could grow in value and provide you with a larger income in the future.

3. Defer your whole pension - If you don't need an income from your pension now, it may be worth deferring. That's because annuity rates improve as you get older because annuity companies anticipate paying an income to you for a shorter period in total.

As we have already seen the best annuity rate for a 65 year old male is 6.63%, while for a 70-year old it rises to 7.63%. This increases income by £500 a year based on a £50,000 pension pot. But remember, while you'll gain by receiving a higher income at 70, you'll lose by sacrificing annuity payments for the next five years.

4. Boost your annuity - There's no question standard annuity rates are pretty abysmal right now, but you could increase the income you receive by opting for a smoker annuity, an enhanced annuity or an impaired life annuity.

Among other factors, the rate you'll be offered will be based on your life expectancy. If your life expectancy is below average - for example if you smoke or suffer from a medical condition - you may qualify for better rates. On today's rates, the best smoker annuity could boost the income of a 65-year old man by more than £500 a year (based on a rate of 7.66%).

If you're in serious ill-health opt for an impaired life annuity which could increase your income even further. Don't miss Enhance your pension income by 25% to find out more about enhanced and impaired life annuities.

5. Shop around - If you don't qualify for better rates and you have to buy your annuity now, make sure you shop around for the most competitive rates. This is called using the Open Market Option which is well worth it since some annuity companies are significantly more generous than others. Take a look at How to buy the right annuity for a step-by-step guide.

6. Think about an Unsecured Pension (USP) - You could bypass annuities by choosing USP - or what used to be known as income drawdown - instead. This means drawing an income from your pension while it remains invested on the stock market (or in other assets). With USP there's the potential for your pension to continue growing in value giving you a higher income in retirement. But, equally, your pension is at risk if it doesn't perform well which could have the opposite effect on the amount of income you can take. Read Increase your pension by £1,000 for the full lowdown.

7. Mix an annuity with USP - Have you ever heard of a variable or third-way annuity? This relatively new innovation is like a halfway-house between annuities and USP. It provides exposure to riskier assets - such as shares - but also guarantees a minimum income. If the fund performs well you may be able to increase your income. But if it doesn't, you'll still get the guaranteed amount. Find out more in A new way to boost your pension income.

There's no question taking benefits from your pension can be tricky. If you're having trouble ask for help on Q and A and get some solutions from other lovemoney.com readers.

More: Don't work until your dead | Three ways to boost your pension you've never heard before