ANNUITY RATES REACH A PEAK

One consequence of the credit crunch has been a rise in the yields on the fixed interest securities that underpin annuities. By September 2008, annuity rates had reached a six-year high.1 This is good news if you are looking to convert your pension fund to a lifetime income, although the bad news could be that the credit crunch has also affected the value of your pension plan.

If you have no immediate plans to convert your pension fund into an income but are close to retirement, it could still be worth asking us to give you an illustration of what is available.

Postcode annuities
Higher rates have not been the only development in the annuity market this year. The growth of competition has prompted one of the UK's biggest insurance companies to launch postcode annuities, ie annuities based on the exact postcode of the purchaser. The theory behind these is that the more affluent the area in which you live, the longer you are likely to draw your pension. So if you area Kensington pensioner, you will receive a lower annuity rate than if you live in one of the tougher parts of Glasgow.

Postcode annuities are the latest example of a trend to tailor the annuity rate you are offered more closely to your personal circumstances. For example, there are now several annuity providers offering 'enhanced' rates based on a lifestyle or other factors, eg smoking or diabetes. A handful of companies go further and will quote 'impaired life' rates if you have a serious health condition, possess a sufficiently large pension fund and are willing to undergo any necessary medical examinations.

Annuity selection
If you are considering buying an annuity, your first step should be to seek independent advice. Your pension plan provider may well offer you an annuity guote, but it may be possible to obtain a better rate by comparing what is available from other providers. It also may not be the most appropriate for your circumstances. For example, it may not allow for the right kind of dependants' benefits or protection against inflation.

There may be more suitable alternatives to annuity purchase and you should seek professional advice to establish which option would best suit your needs and circumstances. The alternatives are generally worth considering if:

• You have a large fund - typically at least £100,000;
• Death benefits and/or inheritance tax planning are important to you;
• You are willing to accept investment risk, which means the value of your fund and the income/payments you receive from it could fall as well as rise;
• You want to leave any unused pension fund to charity.

Please remember that past performance is not a reliable indicator of future values on your pension fund.