Timing retirement can affect annuity income

Employees retiring now may receive a lower pension than if they had made the move earlier in 2004 because of falling interest rates, a new survey of the annuities market reveals.

More than half of the people belonging to private sector occupational pension schemes - those who belong to defined contribution schemes - must use their main pension fund to buy an annuity on retirement.

But the amount of annual income - the annuity - they can get in exchange for their pension fund has dropped substantially since the 1980s as a result of lower long-term yields on gilts and longer average lifespans.

The poor value for money in the market has worsened since before the summer, the survey by investment firm BDO Simpson Xavier shows.

In June, the best annuity for a male who was retiring at the age of 65 with a pension fund worth €100,000 was €7,716, according to a previous BDO survey.

A male in the same situation who bought an annuity on October 1st would receive a maximum of €7,440.

This leaves the retiree €23 per month worse off than if he had bought the annuity earlier this year.

However, the new BDO survey shows that shopping around for annuities at retirement is even more important than getting the timing right.

The best quote for the 65-year-old male with a €100,000 fund was available from Standard Life. If the retiree buys his annuity from the least competitive provider - Friends First - he will receive an annual pension of €6,785, €655 a year or €54 a month less than if he had selected Standard Life.

But the best way to boost your retirement income is to be born male.

As women live longer than men, insurance companies require them to spread their pension fund over a longer period.

This means that female members of defined contribution pension schemes will receive a lower retirement income than men who put the same amount of money into their pension.

A female who retires at the age of 65 with a €100,000 pension fund will receive an annual income of just €6,700 from the most competitive insurance company in this market, Canada Life.

Her pension will be €740 a year or €62 a month smaller than that of a male in the same situation who seeks out Standard Life.

These figures are based on a single life annuity paid monthly in advance and guaranteed to be paid for five years, whether you live or die.

Guarantees for 10 years are available for very little extra cost, according to Mr Alan Flynn, partner at BDO Simpson Xavier.

Most pension arrangements allow for an "open market option", which means that people don't have to stick with the company where they have been investing their pension.

As companies may deliberately try to stay out of the annuities market by offering non-competitive rates, it is vital for individuals or the trustees who are acting on their behalf to shop around for annuities, rather than accept the first quote.

Mr Flynn says the company has to update its survey regularly to keep abreast of what is a constantly changing market.

Quotes for annuities must usually be accepted within seven to 14 days of the date of quotation, otherwise the individual or trustee may need to make a fresh application.

The Pensions Board describes the purchase of an annuity as possibly one of the most important financial transactions in an individual's life.

"Certainly it is one with very long-term consequences," according to the board's updated guide on the subject. Copies of the guide are available at www.pensionsboard.ie. They may also be obtained by writing to the Information Unit of the Pensions Board at Verschoyle House, 28-30 Lower Mount Street, Dublin 2, or by ringing 01-613 1900 or lo-call 1890 656 565.