An annuity is bought when you want to turn some or all of your pension savings into a guaranteed income for life. Think of it is a wage in retirement. Each month money will drop into your bank account for you to spend as you wish, giving you peace of mind and certainty.

The good news is that pension annuity rates have increased more than 20% so far in 2022 and are around 35% up since the start of 2021.

But if you’re considering buying an annuity, these are the steps you should take to make sure you get the best deal

Shop around

Never accept the offer made to you by your existing pension provider without considering rates available elsewhere. Take the time to think about the right shape of income for your individual circumstances. It could make a huge difference to the income you and your family receive.

Many of us would baulk at the idea of accepting a car or home insurance quote without comparing the market and this is no different. You may not get a stuffed meerkat or cinema tickets but the increase in income through your retirement should more than make up for that.

Be open about your personal health and lifestyle

The questions might seem very personal, but all are designed to make sure you get the highest income available at the point you retire. Many of us are uncomfortable talking about any illnesses or medicine we take but disclosing as much information as possible means you will get the highest income available.

Common conditions which will result in a higher income include diabetes, high blood pressure, high cholesterol, smoking and people with a high body mass index.

Death benefits and protecting loved ones

Death benefits are another key point. The highest income will be one which is only paid to you, remains the same throughout your life and stops when you die. That may be the best option, but you may want to consider alternatives.

You can choose various options to protect your loved ones. One option is known as a joint life annuity which means some or all of the income continues to a certain individual, usually a partner, after your death. The downside here is it is only paid to that specific individual.

An alternative is an income guarantee. For example, income is normally paid for life but adding a 30-year guarantee means the income will be paid for at least 30 years even if you die earlier. That means if you die after eight years, a further 22 years of income will be paid to your partner, children, or another nominated beneficiary.

A further option is called value protection which is a money back guarantee. If you use £50,000 to buy an annuity and have received £10,000 of income before you die, a lump sum of the balance – in this case £40,000 – will be paid to your nominated beneficiaries. If you die before age 75 that is tax-free, while for those aged 75 and over, it’s liable to income tax.

Each of these options can give peace of mind that you are providing for your family and getting value for money from your annuity.

If you are concerned about the rising cost of living, then you can protect your income by using an annuity which increases each year. This can be a fixed percentage, for example 3% a year, or line up with inflation. The benefit is your income should keep up as the cost of living goes up. The downside is the starting income is usually significantly less than a level income.

An annuity isn’t an ‘all or nothing’ decision

You can use part of your savings to guarantee an income through an annuity to cover your essential bills, while leaving the rest invested in drawdown. The invested funds give flexibility and hopefully grow over time to help offset the impact of inflation through careful choice of investment funds.

Alternatively, you can start in drawdown and move to annuity later in life. This has the advantage of getting better rates, given you are older, and perhaps more likely to have some health issues.

Andrew Tully is technical director at Canada Life