Ways to beef up your lump stake

David Herring has advice for maximising personal pensions
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Retirement is round the corner and you have to decide how to get the best possible deal from the lump sum built up in your personal pension fund. You know that you must buy an annuity with it, an annual income for life. So you turn to the company that has looked after your money for the past few years - after all, its managers have delivered first- class investment returns. They quote an attractive price, which you decide to accept. Simple.

So what could possibly be wrong with that strategy? By sticking with your fund manager, the annuity - or retirement income - you receive could be 20 per cent less than if you had shopped around, that's what.

Think about it. You are 55 years old, maybe pushing 60. Do you really want to spend the rest of your life with an income that much less than you might have received?

The second, and equally important, point is that not all annuities are alike. As with most good things, they come in all shapes and sizes. The standard quote may well be for an annuity increasing at 3 per cent with a dependant's pension of 50 per cent on your death. But this may not be appropriate if you need a high level of income at the early stages, for instance if you still have outstanding mortgage requirements. In this event, a non-escalating annuity, which could give higher initial income, might fit the bill better.

Or, you might be worried about higher inflation in the long term. In this case, it is possible to purchase an index-linked pension. Alternatively, if you believe inflation is likely to remain low, an annuity increasing at 5 per cent a year will fit the bill.

A pensioner's health and that of his or her partner is an important consideration. If the partner is in poor health then a single life annuity, where no pension is paid when the annuitant dies, might be more appropriate. It may sound callous, but the income is higher. If the annuitant is in poor health, it is sensible to raise the dependant's provision, perhaps through an annuity that does not reduce on the first death, or a guarantee that pension payments will continue for at least 10 years.

Some insurance companies will offer better terms to those who are not in the peak of condition, or those who are overweight or who are committed smokers.

Under some executive pension arrangements and occupation schemes, where ill health is likely to result in a significant reduction to an individual's life expectancy, the trustee may have the power under Inland Revenue regulations to commit a member's entire pension to be exchanged for a tax-free cash sum.

Some may want to continue to control the investment of their pension fund and may be in a sufficiently favourable financial position that an immediate pension is not necessary. Alternatively, there is a need to retain flexibility. In these instances, deferring the annuity purchase by utilising some form of "income draw-down" is an option, where part of the pension fund that is not used for income continues to be invested and to earn an investment return until the annuity is purchased. However, income draw-down contracts are highly sophisticated. Experts believe that they should not be considered without taking qualified independent advice, or for lump sums of less than pounds 100,000.

Alternatively, a pension fund might be clustered into a group of smaller policies and used to phase retirement by purchasing 10,000 much smaller annuities and leaving the greater amount invested, according to individual needs.

Obtaining the best quotes, and the advice needed to make a decision, is not difficult. Most independent financial advisers can call up the best deals from annuity companies on their computer screens. Alternatively, a number of annuity specialists have up-to-the-minute information at their fingertips.

Do not accept the first annuity quotation you are given. Consider what best suits your needs - if indeed an immediate annuity is required - and ensure that the best terms are obtained. Sometimes the right choice is not the simplest. But you only have to make this choice once

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