During their working life many people save towards their retirement by using a personal pension as a saving plan. When they come to retire, they sell the pension fund to a company in exchange for a monthly income for life. This is called an Annuity. It is therefore essential that you shop around before accepting the annuity offered by your current provider.

Many people however can get confused about how their plan works and are unaware that the pension may be more flexible than they realise.

Some common misunderstandings are :

• The pension can only be taken when they reach either the state retirement age (typically 65), or the retirement age indicated in the pension contract.
• When they take an income from their pension, they have to take the income offered by their current provider.
  

It may be that you need more income before you completely retire, therefore taking your pension early may be an option. Obviously the monthly income paid will be lower, the earlier you take your pension. Our opinion is that you should only take income from your pension early if it is essential to your needs.

It may be the case that when you reach your selected retirement age, you have sufficient income from other sources. You could therefore decide to take your pension at a later age, as the monthly income will increase the older you are when you take your pension.

In the case above, you may want to protect your fund value by moving it into a cash or deposit fund. This should protect you from any downturns in the investment market.

You may also want to just take your Tax Free Cash and leave the rest invested for later. See our Tax Free Cash only section.

The Financial Services Authority (FSA) has criticised some pension providers for not making it sufficiently clear to customers that they have the right to shop around for the best annuity. The FSA’s own assessment is that shopping around for your annuity could increase the monthly income you receive by as much as 30%.

Of course you need to ensure that when you are comparing quotes from various providers, the quotes are all on the same basis. While a quote that offers £550 per month may appear to be better than one that offers £500, you may change your mind when you learn that the annuity offering £500 will increase with inflation and pay your spouse a pension when you die.

There are many features you can add or take away from an Annuity. These will all impact upon the monthly income offered. We will discuss these features later in the section entitled "What you need to decide".

We will do all this work for you and then present you with the results in a simple easy to understand format. You are not under any obligation whatsoever to take up any of the quotes we present to you, and you will not be charged a fee.

We will ensure that all the quotes are on a like for like basis. If a provider quotes on a different basis, it can have a major impact on the figures and you could end up selecting the wrong annuity.

While providers are generally efficient, we have known the odd mistake to be made.

We will focus on the Annuity quote that offers you the most income, but we will include information on the quotes offered by all other providers. That way we can demonstrate that we have done our job as promised to you.

Unlike some other companies, we do not use calculators to offer you instant quotes. Anybody can do this, and in our experience they cannot always be relied on. The quotes you receive will be personalised to you and will be guaranteed for a period of 30 – 45 days (depending on the provider).

You can ask us to start this process for you by either calling us on 0845 83 87 811 or answering a few simple questions on our Request Quotes page.

Upon receiving your instruction, we will contact your existing pension provider to obtain an annuity quote.

We will ask you to give us written authority to speak to your existing pension provider to see if your pension contract has any special conditions which could indicate that it is best for you to stay with your existing provider. Without this written authority, your pension provider will not be able to give us specific information about your pension.

We can of course obtain quotes purely based upon the information you provide. In such cases we are sure you understand that we could not be held responsible if you moved away from a pension that offered enhanced rates or guarantees.

We will need to get an understanding of the features you require from your annuity, for example: do you want the income to be guaranteed for a period, even if you die; would you like your partner to continue to get a pension if they should outlive you; and so on. Obtaining this information from you should not take more than a few minutes.

You are of course welcome to call us as often as you like, in fact many of our customers enjoy phoning us as they know we will make time for them and ensure all their questions are answered.

Even if you don’t call us, we will keep you informed during every step of the process and keep you regularly updated.

It is also worth remembering that the decision you make now will be irreversible once you have made it, and it is likely to have a financial impact on you for many years to come.

There are a number of features that you may want to include within your annuity. It should be remembered that as you add features to your annuity, the amount paid in monthly income is likely to go down, but you may consider some features too important to leave out.

The benefit of an index linked annuity is that the monthly payment should keep pace with inflation. While this is an attractive option, the initial monthly payment for an index linked annuity will be significantly lower than the payment offered for a level annuity. In our experience, it can take up to 10 years before the monthly payment from an index linked annuity catches up with the payment offered from a level annuity. Again, in our experience, this results in more people selecting a level annuity.

Spouse’s / Partner Pension

In most cases, the amount paid to a surviving partner tends to be about half the amount paid to the original annuitant.

Unless the pension fund is particularly low, most couples tend to choose this option.

If your pension fund contains a “protected rights” element, then the part of the annuity that relates to the protected rights amount, will automatically include a spouses pension.

Guaranteed Period

So if your pension fund is worth £100,000 and you die 3 months after taking your first payment, will the annuity provider keep the rest of the money? If you choose not to have a guaranteed period, then the answer is yes.

It is possible to choose a guarantee period, which is typically 5 years. Some providers may offer a 10 year guarantee.

The guarantee will ensure that if you die during the guarantee period, the pension will continue to be paid at the full level until the guarantee period expires. After this point it will either stop, or if a spouse's pension has been selected, it will pay out at a lower level as described above.

Payable in advance or arrears

Payment in advance could be beneficial for people taking their annuity payments quarterly or annually.

With or Without Proportion

If you choose the "With Proportion" option, this means that if you die midway through a payment period (most people do!!), then rather than pay the estate nothing, the estate will receive payment for the proportion of the payment period that the annuitant was still alive.

To keep it simple; if an annuity paid in arrears pays £1000 per month and the annuitant dies exactly half way through the payment period, the estate will receive £500.

If the "Without Proportion" option is selected, then either nothing or the spouse's pension would be paid.

Overlap

The intention of "Overlap" is to pay an immediate spouse's pension, on top of any pension payable as part of a guaranteed period.

For example, an annuity is taken for £1000 per month with a 5 year guarantee. The annuitant dies after 2 years. The guarantee period will ensure that £1000 per month is paid for the remaining 3 years, and from year 6 onwards £500 per month goes to the surviving partner.

If the Overlap option is selected, then the spouse's pension also becomes immediately payable. This means that for the remaining 3 years of the guarantee period £1,500 per month will be paid. At the end of the guarantee period, the payment will reduce to £500 (the original partner’s pension).

Protected Rights

It is possible to have those National Insurance contributions diverted from the Second State Pension into a private pension. This is known as “Contracting Out”.

Any contracted out payments sitting within a personal pension are known as protected rights. As these amounts are intended to replace some benefits offered by the State, there are some conditions about how this element of the pension is taken.

Protected Rights annuities must offer a spouse’s pension and a 5 year guarantee.

Since pension rules changed in April 2006, people who have contracted out can take 25% of their protected rights fund as a tax free lump sum. If they remain within the state system, the whole amount is used to provide income.