Put your pension pot to work

By Simon Gompertz

It's not quite like browsing for the latest fashions or choosing tasty titbits at the supermarket, but checking out the best deal for your annuity could turn out to be much more rewarding.

You buy an annuity with the proceeds of your personal pension plan, if you have one.

It's an income for the rest of your life, guaranteed by an insurance company.

Annuities don't crop up much in everyday conversation, which is perhaps why so many people neglect to think about them properly when the time comes to buy one for real.

"Someone with a small pension plan could enhance their income by 9% by shopping around," points out Stuart Bayliss from the specialist advice firm Annuity Direct.

Go elsewhere

A typical 65-year-old with a personal pension pot of £30,000 could gain hundreds of pounds a year.

For bigger savers, the gains can run into the thousands.

Everyone has the right to tell his or her pension company to push off and to go elsewhere to find a better annuity deal.

But the number exercising this right appears to have been dropping, in spite of a campaign from the Financial Services Authority to spread the word.

Since last September, insurance companies have been obliged to tell those coming up to retirement that they don't have to buy their annuity from the company which managed their pension savings.

Numbers are down

Yet the proportion of new pensioners switching to a different company for their annuities has dropped from 38% last year to 31% in the latest three-month period.

The Association of British Insurers claims that people are asking for rival quotes, but that often their existing pension provider turns out to be offering a reasonable deal.

Stuart Bayliss is concerned that those with more modest savings are losing out.

Stuart: Get quotes for the annuity you want

Independent financial advisers can be reluctant to help anyone with less than £40,000 to put on the table.

Left on their own, the soon-to-be pensioners are too easily convinced that there is little cost to staying put.

Stuart Bayliss says that's often the case when the figures they are sent are for a single life rate, which stops when you die, rather than a joint life annuity, which continues to your partner if you die first.

"They then choose to have a joint life rate and what they don't realise is that the joint life rate from that company could be bettered by 10% or 12% in the marketplace," he explains.

Here are some tips for anyone browsing for an annuity.

Check with your current pension provider. If it has provided a quote, you need to be clear what sort of annuity it is suggesting. You may have special terms, such as a guarantee of a high level of income.

Get quotes from other companies. Look at the comparison tables provided by the Financial Services Authority at www.fsa.gov.uk.

Remember to compare like with like. There are lots of different types of annuity.

Talk to an independent financial adviser if you can. The adviser is usually paid by commission, so the cost should not affect the annuity income you receive - but do check. Some specialise in annuities.

How much you get will depend on a variety of factors.

The amount you have saved in your personal pension plan.

The annuity rate on offer - rates differ from company to company.

The type of annuity. Just for you, or for you and your partner, or rising with inflation.

Your age, sex and state of health. If you have a medical condition you may qualify for an "impaired life annuity", which pays a higher income.