It’s all change in the once sleepy world of annuities. And before you yawn with boredom, be aware that you may well have to buy one yourself, whether you like it or not.

This is because three quarters of final salary (defined benefit) schemes are now shut to new employees and more workers belong to group personal pensions or have some form of individual personal pension arrangement, such as a stakeholder or Sipp.

All these types of personal  pension require you to buy an annuity with your pension fund when you come to retire (unless you decide to do income drawdown instead, but that’s another story).

The cost of buying an annuity has soared over the last 15 years, as bond yields have fallen and longevity has increased.

In addition, whereas most insurers used to assess annuitants’ likely life expectancy based on gender, age and marital status, the business of rating how long someone is going to live is now a much more sophisticated.

This is because the difference in lifespans in different parts of the UK is quite stark. People living in Glasgow, for instance, have the shortest likely lifespans for anywhere in the UK, whereas men living in West Dorset have the longest.

Hence, the shift to what is known as ‘postcode annuities’ whereby insurers look at geographical, as well as health and socio-economic, factors when estimating life expectancy.

The idea is that if you live in an area with a history of people dying early, the insurer will pay you a higher annuity income because you are likely to die much sooner than someone living in a ‘long life’ hotspot,  such as Bridport in Dorset.

There are also strong correlations between blue collar workers living in the north of the UK and shorter life expectancy, and wealthy white collar employees in the south and longer life expectancy.

Norwich Union is to follow Legal & General and to start using postcode annuities from September this year. Annuitants will be divided into nine groups based on geographical life expectancy, with those with the shortest life expectancy receiving up to 2 per cent more than those with the longest expected lifespans.

NU admits that this will mean that around 30 per cent of ‘healthy annuitants’ will be worse off.

Defaqto pensions principal Matt Ward says: “This development is yet another sign that annuity rates are moving towards an individual pricing basis. The onus for consumers who view annuities as their preferred method for translating retirement savings into retirement income is to shop around to find the best annuity rate in the market for their individual circumstances, whether this be through their smoker status, health outlook or postcode.”   

Currently only one in three individuals approaching retirement bothers to seek out the best rate in the annuity market by using what is called “the open market option” - or the right to shop around, to you and me.

By doing so, you could obtain up to 16 per cent more than the standard rate if you are a smoker, and up to 30 per cent more if you have a life threatening illness or medical condition.

It is best to use an Independent Finacial Adviser when looking to purchase an annuity as it is a complex business and once you have bought an annuity you can’t change your mind afterwards. 

It really is a ’once-and-for-all’ decision which will affect your income for the rest of your life.

 You can get an idea of how much your pension fund might buy you  by using the Defaqto Annuity Calculator:http://www.defaqto.com/consumer/pensions.aspx

IFAs specialising in the annuity market include:
http://www.williamburrows.com/
http://www.retirement-partnership.co.uk/
http://www.annuitydirect.co.uk/
http://www.annuity-bureau.co.uk/