Who is to blame for this lack of comparison by savers? Well some blame the providers, others might blame the regulators for not being more stringent with providers in forcing them to provide better and more explicit information. You could lay the blame at annuitants but with the average man in the street barely being able to explain what an annuity is, you can hardly blame them for not knowing that you need to shop around to get the best deal.

Whoever you think is to blame, the bottom line is that thousands of pensioners are needlessly missing out on potential retirement income. And with the annuity market being ever more flexible, with dozens of different products on the market, such as short-term annuities, there really is a whole host of choices for those looking at buying an annuity. Often criticised as being restrictive and inflexible, these new solutions that are coming onto the market should make the idea of buying an annuity more appealing, despite the glut in rates.

Although on the face of it this would seem that more annuitants are getting the right annuity for them, it does mean that those who do not qualify for enhanced rates will continue to have to endure longer life expectancy and therefore very often, lower rates. It is also expected that the sales of enhanced annuities will continue to rise throughout 2010. At the moment they make up around one third of all annuities that are sold under the open market option.

Enhanced rates can provide a significantly higher pension income, so if you think you may qualify make sure you tell your current provider or any other provider you speak to when shopping around for the best deal.

To illustrate the current woes of pension savers, experts estimate that the average couple of pensionable age are now £7,000 a year worse-off now compared to December 2008. Billy Burrows from Burrows & Cummins says that “‘...the world has changed for a large part of Middle Britain. The credit crunch has been a watershed for those people in “comfortable” positions – those who aren’t reliant on state benefit but not rolling in money either. These people have been hit with a pensions double-whammy: they’ve already lost money from their funds as stock markets have slumped, but now they’re reaching retirement age and are being hit with low annuity rates.”

With rates for annuities falling in the past 24 months, it has become more difficult for those approaching retirement without a final salary scheme to feel secure in their finances. Nowadays, it is absolutely essential that you shop around providers for the best deal.

To show just how far rates have fallen, those with a Joint Annuity fund of £100,000 in December 2008 could have enjoyed an income of £6,700 a year. An equivalent annuity now would be worth just £6,000. Much of this fall has been blamed on the Bank of England who have bought up gilts (government bonds) which has boosted their value but lessened the yield.

For the best deal on a level annuity, you should goto Aviva who are offering an annual income of £6,420 for a 60-year old man with a pension fund of £100,000. Another type of annuity that has not seen any falls yet are smoker annuities with Reliance Mutual appearing to offer the most lucrative rates of £7,023 per year for a 60-year old male smoker with a £100,000 pot.

Tim Whiting who works for Alexander Forbes Annuity Bureau noted that there was concern over global debt that would filter through to the annuity market. He said that…”….there are worrying signs that rates may not remain steady for much longer. Canada Life may well have reduced its rates for its own commercial reasons, but over the long term demographics and gilt yields are likely to combine to cause rate fluctuations“

Given this fact, it is essential that you get some proper advice over what to do. Now, you could consult an independent financial adviser, which is certainly the place that most people would want to start. However, they do charge for this advice, sometimes at over £100 per hour and for those with smaller pension pots this may not seem like a logical thing to spend money on. However if they are a member of the registered annuity and pension bureau then you are protected under consumer law if they give you advice that turns out to be false or misleading.

But in our opinion, the best place to start is on the internet, where there is lots of information on sites like this one. Do a search on Google for “pension annuity” and you will find heaps of useful information. Annuity websites generally fall into four categories; that is providers such as LV=, Zurich, Standard Life, Prudential, AXA, Canada Life, MGM Advantage, Aviva, Aegon and Friends Provident. Then there are annuity advisers/brokers such as Annuitysupermarket.com and Just Retirement. There are also several information/news sites such as rightannuity.co.uk and annuity-rates.org. Finally there is lots of information on the FSA website itself. So, there is plenty of information for you to get your teeth into before you have to cough up any money for professional advice. Please note, this research does NOT constitute a replacement for proper independant financial advice, it merely acts as a good starting point.

If you want to know about the main annuities on offer in the UK, then check out our pension options page.

With rates for annuities being so poor (28% fall in the last 10 years), despite a recent boost at the start of 2010, it seems many people who are about to retire will be in forced into lower living standards than they are accustomed to.  According to the website rightannuity.co.uk “…A personal pension in which £100 was invested monthly for 20 years would have matured ten years ago with a pay-out of around £104,000. But today the same policy would produce a mere £40,800, according to analysis published by Investment Life & Pensions Moneyfacts.”

And if you think that was bad enough, annuity rates in the future could be even worse, given that new EU rules mean that insurance companies will soon be having to hoard more capital to keep their balance sheets in check. This is bad news all round for annuitants as many will find that they have not saved nearly enough for retirement. Some may be forced to work full time for longer (delaying retirement), work part-time during retirement or considering taking out equity release to free up some of the capital tied up in their home. For most people, none of these options will sound like an appealing retirement choice!

Take for example a man aged fifty with a fund of £30,000 , this would equate to an annual annuity income of £1,628.87 or just over £135 per month. Should the man wait until he is fifty-five, the annual income would be £1,735.19 a year or just over £143 per month. But in the intervening five years he would lose an income of £8,139.87.

Bob Bullivant, from online pension specialist Annuity Direct warns about the dangers of taking your pension later in life…“…it is tempting to defer taking a pension, as rates are quite low today. But this does carry a risk. annuity rates are moving all the time and while people may think they can get more by waiting, they’re forgetting the money they are losing during that waiting period.” The above example is also based on the fact that you can get the same rate for an annuity in five years time as you can today. Given that rates have been falling for the last fifteen years, there is a strong possiblity that rates will be lower in five years time.

Main Advantages

• Will provide an income for the rest of your life whilst protecting your purchasing power.
• Protects against high inflation and price rises.

Main Disadvantages

• Initial income is lower when compared to a conventional annuity.
• Rates will be based on a forecast of future inflation.
• Unless you take out a guarantee against zero inflation, if the inflation rate were to hit 0% then your income would go down.
• RPI is not always the best barometer of pensioner income levels.

Life expectancy is getting longer all the time and even small rises inflation could harm you income. By tagging your income to the RPI, you can guarantee that your pension income will keep in line with inflation. You can protect against deflation or no inflation, but this will mean a lower starting income.

Main Advantages

• Predictability of a fixed monthly income
• Security in the knowledge that you will always have an income and not ‘outlive’ you pension savings.
• Can take a cash-free lump sum (up to 25%) at the start of the scheme
• Incremental increases can be agreed, but with a lower initial income. (guaranteed increases / escalation)

Main Disadvantages

• Cannot mitigate for changing circumstances, such as steep rises in inflation or personal changes.
• Cannot be changed or adjusted to take advantage of future investment return opportunities.
• Death benefits will mean a lower starting income which cannot be changed once chosen.

Death Benefits

• A husbands/ wife / dependents pension up to 100% of the pension you had received
• If you die within 10 years of taking out the annuity, the payments you would have received are paid to your estate.
• Value Protection – if you die before age 75 the starting pension fund value (minus the gross income payments already received) can be paid out, subject to a flat rate of tax of 35%.

Although conventional annuities are appealing given the stability and security they offer, in reality your income in real terms will be going down each year if you opt for level payments. Any rises in prices such as food, petrol or energy could eat away at your income. Also if rates improve after you take you annuity out, you will have missed out on a higher annual income.

If you factor in escalation or guaranteed increases, you will be able to vary your income increase from 0.1% – 8%. This could help offset inflation but if inflation is very high, even the increases may not be enough to increase your income in ‘real terms’.

However they can be restrictive, for example if you purchase a standard life annuity and then suddenly incur a health condition that may shorten your life, you are locked in to the rate you agreed to when you bought the annuity. Another issue is that rates have fallen steadily, by around 30% for the average male with a lifetime annuity in the past 10 years some estimate. Given this fact, it is hardly surprising that they have become less appealing in recent times.

The second option on the table and one which many people (particularly those with larger pension pots) often opt for is called income drawdown. Under this scheme, your pension pot remains invested and you draw and income from the pot, based on the performance of the investments, although there is a minimum level of income that is guaranteed. However this can only be continued until you reach the age of 75 when either you must buy an annuity OR choose what is known as an alternatively secured pension. This, abbreviated to ASP, is similar to income drawdown but has extra rules over how much of an income you can draw. The amount you take from income drawdown will depend on many factors, for example if you were in your early fifties, you might not want to take an income at all and keep the money invested. The great benefit of income drawdown is that you can have control over when you buy an annuity, often waiting for favourable market performance and/or better annuity rates.

But as we all know, what can go up can also go down. And with the volatility of the stock market being as it is, those with money tied up in investments will have plenty to worry about on a day to day basis. So with annuities being somewhat restrictive and income drawdown liable to cause uncertainty, what other choices are out there for retirees? Well there is the option to take what are known as fixed term annuities. Although fixed term annuities have been on the market for a substantial number of years, some argue they have been largely ignored by pension providers as well as annuitants. In fact only two UK pension providers actually offer this product at the moment, that’s Living Time and LV= (Liverpool Victoria) – who incidentally only launched their product in the past few weeks.

As you might expect from the name, fixed term annuities, cover you for a set period of time. This can be anything from 3 years up to however long it takes you to reach 75. You choose the level of income you want to receive over this period. The provider also tells you the amount of money you will get back at the end of the period to buy another annuity. Both are guaranteed. However, initial income may be lower than what you might expect under a conventional lifetime annuity. But it should be noted that this option is much more flexible. For example if you opt for a conventional annuity at age 60, you may only qualify for a standard rate as there was no medical condition that would have impacted on your life expectancy. However by the time we all reach the ripe old age of 75, around half of us will have something that will be medically wrong with us. Now with a lifetime annuity bought at age sixty, you are stuck with the standard rate. However if you acquire a fixed term annuity at age 60, this could be set to expire at age 75 when you can opt for perhaps enhanced or impaired life annuities.

Although it might sound a bit strange to plan your finances around the notion of becoming ill in the future, did you know that some enhanced schemes pay up to 75%% more than standard life annuities. If something does effect you medically in the future you’ll be glad you chose a fixed term annuity. The major advantage fixed term annuities have over income drawdown is that they eliminate the concern over the performance of the stock market, which battered many a pension pot in the last two years. Moreover you get the secure feeling that an annuity provides without the restrictiveness. Many in the pension industry will be hoping that other major pension providers in the UK will start to offer this product given it’s benefits and flexibility.