Personal finance: Be ready to jump ship for a better annuity

MOST companies don't go out of their way to broadcast information that is contrary to their own business interests. That is understandable, but you need to know when their silence affects your finances.

One example of this is the attitude of insurance companies when they discuss future plans with pension plan customers close to retirement. The insurance company will offer to swap the pension fund for a contract to provide an income for life, called an annuity. What many customers don't realise is that they don't have to accept this offer: they can shop around for the best annuity rates. And the difference between the best and worst offers can be 25 per cent, boosting retirement funds by many thousands of pounds

Amanda Davidson, partner at London-based independent financial adviser (IFA) Holden Meehan, says: "It's not always evident that you've got a choice. You are presented with around half a dozen pages with figures on them and there is always more information about staying with the company than about going elsewhere."

The problem affects people approaching retirement who have the bulk of their pension built up in personal pension plans or in "money purchase" company schemes, which operate on a similar basis.

This money is almost always used to buy a retirement annuity to provide a regular income until you die. And those companies that provide the best returns on pension funds do not always offer the keenest annuity rates.

Annuity Direct, a London-based IFA, specialises in giving objective advice on annuity purchases. It reports that it only advises around one in eight of its clients to buy an annuity from any of their existing pension providers.

According to Stuart Bayliss, managing director of Annuity Direct: "The competitive positions of insurance companies in the annuity market are constantly fluctuating and it's no longer possible to say that one company is the best for annuities as a whole."

Accumulated pension fund values commonly run into six figures and choosing the right retirement annuity can be as important a decision as buying a new home. Arguably it is more important because you only have one chance to choose your annuity supplier and cannot change your mind.

As well as obtaining the keenest available annuity rates, an IFA can ensure that you choose the right type of pension annuity. A bewildering range of options is available and no one insurance company offers all of them. Some of them involve having to settle for a lower initial income than you can get from a standard annuity.

An IFA may also discuss more flexible forms of pension arrangement, such as phased retirement and income drawdown. These are schemes that allow you to leave the pension fund relatively untouched so that you are not forced to buy an annuity when rates are poor (this is a problem for people reaching retirement now).

Some IFAs specialise exclusively in this area. The Income Drawdown Advisory Bureau and Annuity Direct will advise on open market options for pension funds. Annuity Solutions is primarily geared to pension funds of pounds 400,000 or more.

IFAs will normally offer you the choice of operating on a fee-paying or commission-paying basis. A fee basis is worth considering for funds worth over pounds 100,000 but a commission basis should be better value for smaller amounts.

It is likely to take two to three months from the time of making initial contact with an IFA to the time of receiving the first pension payment. Because the specialists handle high volumes of retirement annuity business, they are more likely to avoid serious delays.

Contacts: Annuity Direct, 0171-684 5000; Annuity Solutions, 0171-628 3455; The Income Drawdown Advisory Bureau, 0171-401 2040.