Shop around for your annuity: rates for older buyers 'not automatically better'

Buying an annuity with some or all of your pension pot can give you the security of a guaranteed income for life.

When you take out a lifetime annuity, you will never outlive your annuity payments -- and you can choose to protect against future inflation by purchasing an inflation-linked annuity that rises each year in line with the retail price index.

As well as providing an income when you have stopped working, lifetime annuities can also be used to boost your finances if you decide to reduce your hours rather than having a 'hard stop' to your working life.

Whatever stage of your retirement you opt for an annuity, it's important to shop around for the best deal rather than simply sticking with your existing pension provider.

New research from financial services company found Just Group found that with the least competitive deals on the market, older annuity buyers are being offered lower rates than are available to retirees five years younger.

'Get the choice right first time'

Despite a lower remaining lifespan on average, annuity rates on offer to a 70-year-old aren't automatically better than those available to a 65-year-old.

Although annuities typically pay older retirees more than younger retirees because they are likely to have fewer years of life remaining, an analysis of recent market rates by Just Group found that a 70-year-old with a £50,000 pension fund would receive £3,560 a year from the least competitive deal, which is £71 a year less than the current best deal on offer to a 65-year-old. The worst deal for a 75-year-old is £4,024, or £39 a year less than the best deal for a 70-year-old.

"You may have saved with your current pension provider for years but that is no guarantee that they will offer you a competitive rate," said Stephen Lowe, group communications director at Just Group. "In some cases, retirees are being offered rates that deliver less income than people five years younger can secure.

"Annuities give people peace of mind to spend what they receive without worrying it will run out during their lifetime. But you have to get the choice right first time -- finding the deal that will deliver the best income. That means shopping around and disclosing health and lifestyle information that could push up the rate."

Money Purchase Annual Allowance

Most workers no longer hope or expect to have a 'hard stop' retirement, where they simply stop working and rely solely on their pension. It's becoming increasingly common to transition into retirement -- working fewer hours while starting to draw from pension savings.

If you're looking to do this, it's worth considering buying a lifetime annuity with part of your savings as an alternative to income drawdown or cash lump sums, Standard Life said last month.

That's because drawing down or taking lump sums from your pension pot can trigger the Money Purchase Annual Allowance (MPAA), which means the amount you can pay into your pension each year and still receive tax relief on drops from £60,000 to £10,000. MPAA is not usually triggered when buying a lifetime annuity.

Familiarity with tax rules

"Having some level of familiarity with the tax rules when accessing your pension savings is vital to ensuring you're maintaining your ability to save or not paying more tax than you need to," said Pete Cowell, head of annuities at Standard Life.

"This is where the role of a financial adviser is particularly important, supporting people with their financial planning needs in their journeys to and through retirement. Individual annuities are worth considering for a number of reasons, and not least due to their ability to provide certainty through a guaranteed pension income, whilst preserving your pension allowance and your ability continue making significant contributions."