The secret to boosting retirement income

There's a television commercial running that's really worth watching. Aviva's annuities advert could make a substantial financial difference to half a million people every year. The message is simple: retirees could boost their income by 10 per cent simply by shopping around for their annuities. While it may not affect you right now, it could make a difference to your parents or grandparents, so it's worth passing the message on.

An annuity is the opposite of an ordinary insurance policy, providing a guaranteed lifetime income for people who have retired. They have to use a large part of their pension pot to buy an annuity so maximising returns makes sound sense, especially as an older person may have to rely on that income for decades.

David Kuo, of financial website The Motley Fool, says: "An annuity is a bet with an insurance company that you will live longer than it thinks you will. You aren't forced to buy your annuity from your existing pension provider, and different companies will have different views about how long you could live. The difference between the best and worst annuity can be as much as 15 per cent, so it is vital to shop around."

Around 450,000 annuities are taken out in the UK each year but Aviva – formerly Norwich Union – estimates that only 37 per cent use what is called an open-market option, which allows people to shop around for the best deal, rather than simply taking the plan offered by their pension companies. Gary Pepler, Aviva's UK life director, says: "It is vital that people make best use of the full value of their assets, whether these are pensions, property or savings."

The company's ad is designed to make people turn to Aviva for an annuity quote, but there are plenty of other firms to choose from. The key for anyone approaching retirement is to take control and make a positive decision. That really means sitting down with an independent financial adviser and talking through the options.

"If you are on the verge of retiring, don't just accept the first offer that comes through the door," advises Aston Goodey of MGM Advantage, another annuity company. "You may have been with your pension provider for years, but that doesn't mean they'll offer you the best deal when it comes to converting your hard-earned cash into a regular income."

According to figures from advisers Hargreaves Lansdown, someone investing £100,000 into an annuity could be better off by £1,434 a year by shopping around. Over decades, that could turn into tens of thousands of pounds.

If you have any kind of medical condition then you could be in line for an even greater payout. A smoker, for instance, could get another £1,209 a year more than the highest-paying conventional rate. It comes back to the fact that an annuity is, in effect, a bet with an insurer. The shorter the company thinks your life expectancy is, the higher the annuity payout will be.

"That's why people should always shout about any lifestyle and health issues, such as smoking. This is the one time when such issues can work in your financial favour," says Nigel Callaghan, pensions analyst at Hargreaves Lansdown. "Around four out of 10 people are entitled to an enhanced annuity, and with the average 65-year-old man having a life expectancy of 21 years, the extra amount can run into thousands."

Research from annuity company Just Retirement reveals that four out of five people retiring have no idea that they can shop around to get a better income. "With knowledge levels so low, it is unsurprising people are missing out on maximising their retirement income," says Nigel Barlow of Just Retirement. "More education is required from the time someone starts contributing to a pension to ensure they fully understand the options available when they come to draw an income."