Personal retirement planning

According to the City watchdog, the Financial Services Authority) the average pension pot is worth £23,000 and two-thirds of annuity purchases are for less than £20,000. So clearly when it comes to retirement and you take out an annuity, you'll be looking for the best rate, right? Well not quite. In fact many retirees diddle themselves out of a better deal through sheer apathy - preferring as they do to use their existing pension provider, rather than obtaining a better offer elsewhere.

Indeed, shopping around for the best deal has never been more important, what with annuity rates having fallen over the last decade and more people being forced to buy one because of the increased tendency of firms to cut back on final salary pension schemes as they switch to money purchase ones.

Existing Inland Revenue rules require people with money purchase pension schemes to convert their pension fund into an annuity by the age of 75 at the latest - the basic premise being to provide not only a secure income in retirement, but also to ensure that funds accumulating in the pension pot (and under a favourable tax regime) are put to use for what they were originally intended for.

Of course, how much you can expect to receive through your annuity will depend upon a number of factors, including size of pension pot, age, sex and health at the outset. Typically if you're male you can expect to receive a higher income than a female for the simple reason that life expectancy rates for women are higher.

Under the so-called open market option you can, in most cases, take out an annuity with a provider other than the one administering your pension pot.

And if you have more than one pension pot - it may be worth considering aggregating them into a single one, given larger funds tend to attract higher rates. Moreover, the most competitive annuities tend to have a minimum purchase price. That said, aggregating your pots (if applicable) does raise your exposure to risk, since you are placing your faith in a single provider.

Also worth pointing out is that smaller pots can sometimes be taken as cash without the need to take out an annuity in the first place. This will apply when the aggregate of total benefits payable to the employee under all schemes (providing benefits in respect of their employment) doesn't exceed £260 p.a. In addition, the Government is currently considering exempting people from having to take out an annuity if their pot is valued at less than £10,000.

So can shopping around make a difference? In a nutshell, yes. Latest data from Moneyfacts shows that a male aged 60 taking out a compulsory purchase annuity (level, but with no guarantee, purchase price £10,000) can expect an annual income of £647.40 through Legal & General. Yet 6th rated Friends Provident will only pay out £616.44. For a female aged 60, on the other hand, Legal & General pays £612.72, while Clerical Medical comes in with £581.70. Corresponding payouts on a joint life, last survivor basis (male aged 60, female aged 55) amount to £534.12 for Legal & General, £503.10 for Clerical Medical. Clearly, shopping around does pay. But before you leap, check the terms and conditions with your existing provider first - not least the fact that it may impose exit penalties should you wish to switch to another firm.

Please note that this articles does not constitute regulated financial advice, which recommends a course of action based upon the specifics of your personal circumstances. The articles are intended to provide general personal financial information. We urge you to consult us before making any important decisions about your finances. Call 01309 675600 for details. Any statement regarding financial services products and tax liability is based on legislation and tax practices as at 1 January 2004, which is, of course, subject to change.The value of any tax benefits or reliefs depends upon the individual circumstances of the investor.When investment performance is mentioned you should remember that past performance is no guarantee of future performance. Where products have an underlying investment content, in many cases the value of the investment can fall as well as rise. For with-profit based investments, there is no guarantee as to the level of bonuses that will be declared, if any. Where mortgages or secured loans are explained do remember that your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it. All mortgages are subject to underwriting, status and are not available to people under the age of 18.