How to buy Annuities

How to buy Annuities

Buying an annuity - turning a pension pot into a retirement income for the rest of your life - is the most important financial decision anyone can make. It's also a one-way journey - once you've signed up and handed over funds, you can't change your mind or have your money back.

But three out of five annuity buyers give it less thought than a mobile phone or broadband contract. They just agree to whatever their pension fund provider puts in front of them.

Our tables show how hard your pension pot has to work. A man aged 65 needs £300,000 to get £17,000 a year in income with limited inflation-proofing - and that's the best deal. Research by the Financial Services Authority, the City regulator, reveals a 20% gap between the best and worst annuities. So spend time finding what's right for you - you could spend the rest of your life regretting a wrong decision.

What are my options? You are most likely to hand over your pension funds for an income for life via an annuity when you stop work. Other options include deferring this decision - perhaps you have another income - or, for those with larger pots, buying into complex options known as income drawdown, which can give regular money without tying up your fund. Whatever you do, you have to convert your pot into an annuity before your 75th birthday.

What happens when I reach my pension age? When you retire your pension provider will invite you.....continued below

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to convert savings into a regular income for life at its own rates. But these are unlikely to be table topping, so ignore this. Instead, insist on the "open market option" (OMO) which means you can source your annuity from the best provider on the market. This costs nothing to use and could net big increases for the rest of your life.

Remarkably, only two out of five people looking for a retirement income do this.

Unless you have an old-style plan with a guaranteed annuity rate, the only reason to opt for the provider's default is laziness.

Where should I go for an annuity? Start with "money made clear" on the FSA website (fsa.gov.uk) where you can input your details and see the best buy for your age and sex - older people are paid more and men get larger annuities than women. Then go to an IFA.

Specialists in annuity advice include annuity-bureau.co.uk, annuitydirect.co.uk, annuity-advisor.co.uk, annuities-online.com, Hargreaves Lansdown (h-l.co.uk/pensions) and williamburrows.com, while find.co.uk/pensions/annuities has a calculator.

What kinds of annuity can I buy? Your choice is jam now or a better income tomorrow. You can opt to maximise your income with a plain-vanilla plan or go for a variety of bells-and-whistles plans which mean less to start with.

· Level annuities pay the same each month or each year for the rest of your life, however long that is. If you die after one payment, the fund is lost. Inflation will also erode its buying value.