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Live long and prosper in your retirement

1 May 2013 6.43pm.

If you are coming up to retirement age, you’ll be beginning to wonder what you are going to live on.

Some people will be lucky enough to have to make very little in the way of a decision about their retirement income. If you have a public sector final salary pension, for example, you’ll simply receive a proportion of your in-work income and that’s that. However, if you have any other kind of pension, you have to figure out how to use the savings you have built up in your pension pot.

Most people end up using it to pay for an annuity (so they swap the lump sum for a lifetime stream of income). In the past, most people have done this through the insurance company that arranged their pension in the first place.

But that isn’t compulsory or, for most cases, the best option. Instead it’s best to shop around to see what’s on offer.

The good news is that the internet (alongside the expansion plans of some of the UK’s biggest brands) is making all this a little easier. Hargreaves Lansdown has recently launched an online annuity comparison site so you can see just what you can get for your money and Tesco has said it intends to do the same. Visit Hargreaves Lansdown at hl.co.uk, input your details and you should get a quote back in a few minutes (although do note that if you then buy through Hargreaves Lansdown, you will pay commission).

For something even quicker (to get a general idea of prices) you can go to find.co.uk and just input the basic details. For example, say you are 67 and have £100,000 to play with. This site will tell you that the difference between the top rate it has (£5,800 a year) and the bottom rate (£5,102) is a whopping 15%.

The problem with these sites, however, is that, while they help you shop around for an annuity rate, they don’t help you figure out what type of annuity you might want. This is important. The rates I mentioned above don’t rise with inflation (as public sector worker pensions do) so the amount of stuff you can buy every year will fall over time.

You can buy inflation-adjusted ones, but their starting income will be much lower — more like £2,200 a year for each £100,000 you have than £5,200. You might think that’s a bad deal, but if you live for 20 years and inflation takes off, you’ll be glad of the protection.

You might also want a joint annuity — if your spouse outlives you she won’t be pleased if she finds your pension dies with you.

Finally, whatever you do, check out the prices of enhanced annuities (Hargreaves Lansdown also list these). These are designed for people in poorer than average health — the fewer years you are likely to live after retiral, the less your annuity is going to cost the company paying it out and so the more they are willing to pay you on an annual basis.

Where a healthy person may get £5,800, a smoker might find they get £7,000 a year. That’s 20% more.