Last month we looked at a few of the first questions the ‘baby boomers’ might be asking themselves as they reach retirement. Having considered these, they will then have to come to terms with a financial product they have probably never had to deal with before – the ‘annuity’!

An annuity is an investment that guarantees to pay a secure income for life. Having made the decision on whether or not to take the cash from their pension fund, most people are then left with the important decision of whether or not they should commit the rest of their pension fund to an annuity?

Annuities are a ‘special case’ in terms of financial products. They are the only financial products which you are legally obliged to buy (you must buy an annuity or Alternatively Secured Pension in order to covert your pension savings into pension income, at least by age 75). They are also the only financial products which, once you’ve bought them, you can never change.

It is, therefore, obviously crucial that people should get the best rate they can, since they will be stuck with the rate they take for the rest of their lives. That is why pensions nowadays offer people the option of shopping around for the best rate, once they have decided which kind of annuity they want. This is known as the ‘Open Market Option’.  People don’t have to take the annuity rate offered by their pension company, but can take it from another provider if they wish. Unfortunately, however, most people don’t do this and, therefore, don’t get the best value from their many years’ worth of savings.

Annuity rates are influenced by many things, the most obvious being age and the yields on gilts. In theory, the annuity rate should improve as people get older because they are not going to live as long. As age is only one of the influencing factors on the annuity rate however, this cannot be guaranteed. As I write this article at the end of 2009, the yield on gilts is increasing due to the economic situation. This makes the timing of annuity purchase an issue for those who have the choice. Others will have to do the best they can.

Other issues influencing annuity rates are believe it or not, the health and postcode of the annuitant. Standard annuity rates are calculated with reference to the average life expectancy for people living in the UK. This is fine for those in good health, but not so good for those who have below average life expectancy. An enhanced or impaired life annuity pays a higher income because an allowance is made for any medical conditions which might reduce life expectancy.

Enhanced rates are also available from some providers for smokers and for certain postcodes. Under a relatively new system, clients of some insurance companies who are coming up to retirement will be examined on their health, marital status, and on their address, with the insurer taking into consideration the entire post code – which refers to exact streets in 1.5 million different areas of the country.

In December 2009, the Association of British Insurers (ABI) revealed that the take-up rate of the valuable Open Market Option among annuity purchasers is actually receding as it fell further to just 34% in the third quarter of 2009, compared with 37.5% in the same period of 2008. According to their figures, just 0.5%, or 358 out of 73,562, of retirees who purchased an annuity from their existing pension company went and bought an enhanced annuity, an income increased above the standard rate because of reduced life expectancy. By comparison, 24% of retirees who exercised the open market option bought an enhanced annuity.

Now that the traditional annuity has been joined by alternatives such as the With Profit Annuity, the Unit Linked Annuity, the Fixed Term Annuity, the Enhanced Annuity, the Flexible Annuity and the Unsecured Pension, the need to speak to an Independent Financial Adviser to discuss your options at retirement has never been greater.

In an age where people go to incredible lengths to compare premiums on just about everything, isn’t it strange that the majority still take the easy option when it comes to taking their retirement benefits. This has to change and if you only go to see an Independent Financial Adviser once in your lifetime, this is the time!