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• Ready for Retirement?

To work out how much your money purchase  personal pensions will buy you in retirement, as a very rough rule of thumb, each £100,000 of pension fund will buy you roughly £5,000 a year in income via an annuity.

It could be slightly more or less than £5,000, depending on your gender, age and state of health and whether you buy inflation proofing, escalation or guarantees.

So roughly speaking, if you accumulate a pension fund of £500,000 from money purchase pensions, this will buy you approximately £25,000 a year in annuity income. Not exactly a prince’s ransom, but that’s the price you pay for buying an annuity – it provides a guaranteed income for life, however long you live.

And there’s the rub. We are all living longer, which is great until you consider the effect that this is having on annuity rates. The longer you are expected to live, the lower the annuity rate the insurance company is willing to pay you.

On current trends, longevity is increasing by around two years every decade, which is one of the reasons why annuity rates have been on a largely downward trend for the last 10 years.

The good news is that there is an open market in annuities and you can shop around to find the best rate because you are not obliged to buy an annuity from the company which managed your pension fund.

You should be notified by your pension provider around 6 months before you retire of this facility to shop around which in insurance jargon is known as “the open market option.”

If you have a large fund or complex requirements, it may well be worth taking independent financial advice from an annuity specialist in order to get the best deal for your circumstances.

For instance, you will need to decide whether you want to buy a spouse’s or dependant’s pension, escalation (the facility for your income to increase each year), indexation (to rise in line with retail price inflation), a guarantee that your pension will continue to pay out for 5 or 10 years after you die, and so on.

Clearly, these extras come at a cost and will reduce the initial income you receive. But given the length of time that you are likely to spend in retirement, it is essential to consider these options, both for yourself and your dependants.