In 1976, the pop group Abba released the song Money, Money Money, containing the line, "if I had a little money". In those days, Abba were not singing about the amount of money needed for retirement. However, "a little money" is becoming an accurate description of an annuity at today's rates.

A conventional annuity purchased today generates only about two-thirds of the income it would have produced five to ten years ago. Accordingly, for those about to retire, the issues are about when to make the annuity purchase, what sort of plan to choose, and where to get the best rates.

Over recent years, a number of concerns have been expressed about the attractiveness of conventional annuities, while other means of providing a retirement income have also been developed.

There has been a growth in the use of investment-linked annuities, while the Government has sanctioned a number of innovative annuity products.

The proposed introduction of the new simplified pensions tax regime from April next year will also result in further changes to annuity provision.

A conventional annuity bought from an insurance company is the tried and tested method of providing an income in retirement. Normally, after any tax-free cash is taken, the balance of an individual's retirement fund will be used to purchase an annuity at the then available rates. The size of the annuity depends on:

* The Type of Annuity, whether it is in single and /or joint life, guarantee or escalating. For instance, if the member elects a level, rather than an increasing income, the initial level income will be greater. For example, if an individual in their early 60s were to elect a level income rather than an income increasing in line with inflation, their starting income would be about 25 per cent to 30 per cent more than the inflation-linked income;

l The prevailing interest rate on long-term gilts and corporate bonds. The lower the rate of interest at the time of annuity purchase, the lower the pension that can be secured;

* Life expectancy. If the gradual increase in the life expectancy of pensioners continues, annuities will become more expensive;

* Age of the annuitant. The older an individual is when purchasing an annuity, the higher the income he/she will receive, as the income will be paid for a shorter period;

l The sex of the annuitant. For the same retirement fund, a man of the same age as a woman will receive a higher income. This is because the man has a shorter life expectancy, which will, on average, mean the income will be paid for a shorter period.

Many individuals purchasing an annuity will be able to qualify for better annuity rates on account of their circumstances.

Most commonly, such rates are available to smokers and individuals with shortened life expectancy. Most recently, however, some providers have been prepared to offer enhanced annuity rates depending upon where an individual lives and /or what the individual's occupation was.

This confirms the need to shop around before a final decision is made.

Most pension schemes will enable an individual to use their retirement fund to secure their annuity with another provider.

This may secure an increase in an individual's retirement by 30 per cent by taking advantage of the open market option.

Unfortunately, the down side to a conventional annuity includes the inherent inflexibility and the fact that when the annuitant dies, the annuity stops, with the provider taking the remaining pension pot. For those reasons and others, a new breed of annuities has secured Government approval. They include an Open Annuity.

This type does not suit all, although it can provide a lump sum death benefit at whatever age the member dies and there is no need to purchase a conventional annuity by age 75.

Most people who will select this option will do so to retain control over their investments, maintain market exposure, and ensure that any remaining money goes back to their estate and onwards to the nominated beneficiaries.

The downside in this retirement planning solution is, as Abba put it, that it "is a rich man's world". The fund for this option to become attractive needs to be in the region of £250,000.

* Graham Laverick is managing director of WR Financial Management, and can be contacted on (01642) 661600.

* Graham Laverick is MD for WR Financial Management in Teesdale, South Stockton. He can be contacted on (01642) 661600.

Published: 20/01/2004