Why this might be a good tome to retire

You may not realise it, but if you have been saving in a personal pension policy, or you are in a money-purchase scheme run by your employer, then now is a relatively good time to retire. The reason is that two trends are running in your direction - annuity rates have been rising, and pension fund values have been going up too.

It is these two factors which will determine how much income you will get from your personal pension fund.

This means that if you retire at a time when annuity rates are low and the value of your pension fund is lower than expected, you will end up with a lower pension than if you retire at a time when annuity rates are higher and the value of your pension fund is high.

Timing: Unfortunately it is difficult to get the timing of your annuity decision right. Take for example the situation earlier this year. In February 2008, pension funds that were invested in equities had fallen by about 6% since August 2007 and annuity rates were down by about 1%.

However, by June 2008 the stock market was only 3% down compared with August 2007 and annuity rates had risen by more than 5% since last August. This means that somebody retiring today would get nearly 9% more pension compared with someone retiring in February 2008 if they had remained invested in equities throughout the period.

In conclusion, purchasing an annuity can be a complex exercise because it is important not only to select the right options but it is also important to get the timing right. Unfortunately many people have little control over the timing of their annuity purchase because when they retire they need a pension. But most people can maximise their income at retirement by following a few simple rules. The first is to consider investing in safer investments such as fixed interest in the run up to retirement. This safeguards against a sudden fall in equity prices as happened in early 2008.

Do not fall into the trap of putting off an annuity purchase in the hope that rates will improve. There is an "opportunity cost" in deferring an annuity purchase as income forgone in the deferral period is rarely made up by higher payments in the future.

And if you have a large enough pension fund consider purchasing your annuities in stages. Phasing your annuity purchase may improve your overall annuity income and provides more flexibility.

Meanwhile, do not ignore the effects of inflation: it will not go away.