It's important to shop around for the best deal for any financial product you buy and that includes annuities.
Unless you're in a final salary pension scheme, most pensioners will ultimately hand over their pension pot in exchange for an annuity - an income for life. Although you're allowed to take 25% of the pot tax-free when you retire, for many, the loss of the remainder is worth the security of a steady income until the day you die.
But did you know that the difference between the rates offered by conventional annuity providers can be as much as 15%? Considering the average life-expectancy for a 60-year old man is more than 20 years and for a female, more than 23 years, you stand to lose several thousand pounds over the course of your retirement if you don't shop around and, unfortunately, vast numbers don't bother.
The pension company you have saved with is now required by law to notify you of your 'open market option' which means that you are free to buy your annuity from a provider of your choice. It's an important decision and one you can only make once, as you cannot change your annuity provider after you've handed over your pension pot.
You can choose an annuity that is linked to the rate of inflation - a sensible move if you're planning to live a long time although it will mean that you'll get less bang for your buck. Alternatively, you can choose a level income, which will mean your income will go down in real terms as the years go by.
For example, a single man aged 65 choosing a level annuity can expect a set income of £7,203 in exchange of a pension fund of £100,000. An inflation-linked annuity would get him £4,807 a year but at least the value of that income won't go down.
Note that your smoking habits or any medical conditions could result in you getting a better annuity rate. This will be based on whether you may have a shorter life expectancy as a consequence and not on your quality of life so if you've got diabetes, a heart condition or liver problems make sure you make your prospective annuity provider aware of it.
Anyone taking up smoking just before buying an annuity won't get an enhanced rate. You have to have smoked at least 10 cigarettes a day for 10 years in order to qualify although your income won't be affected if you give up smoking just after.
The fact is, once you've bought your annuity you're stuck with it for the rest of your life. It's a big decision to take so if you know anyone who's about to take it, make sure they know that it pays to shop around.
Find out more about annuities and the alternatives in our Pensions Centre