Annuity rates have risen by 6 per cent since December, and are now at the same level as a year ago.

In the three months between December 2010 and March 2011 the average conventional rate rose by 6.14 per cent while the average enhanced rate increased by 3.99 per cent, according to annuity provider MGM Advantage.

Craig Fazzini-Jones, director at MGM Advantage, welcomes the news, saying higher annuity rates will ‘provide people with a welcomed financial respite’.

However, the research also showed that the gulf between the best and worst annuity rates is growing. The difference between a top and bottom quartile conventional annuity for a man is 19 per cent, compared to 17.82 per cent in December. For example, a man with a £50,000 pension would receive £3,502.96 a year from the best annuity, but £2,943.68 from the worst.

This means that people coming up to retirement should exercise the ‘open market option’, which means hunting for the best annuity rate across the whole market, and not just accepting the annuity rate that is offered by their pension provider.

It’s also worth looking at enhanced annuities: for example, smokers and those with serious health conditions can get a bigger annual income than they would with a conventional annuity.

Fazzini-Jones says the ‘need to shop around for the best possible annuity rate is still imperative’ and warns that despite annuity rates stabilising, he expects annuity rates to fall.

Flexible drawdown

From Wednesday 6 April, the rule requiring people to buy an annuity at age 75 will be scrapped. Instead, people will be able to withdraw from their pension a similar amount each year to what an annuity would provide. This is known as capped drawdown. There is also flexible drawdown, which will allow people that can show they have at least £20,000 a year of income (which can include money received from the state pension) to take money out of their pension without any restriction.

However, not all pension providers will offer flexible drawdown straight away. Rowanmoor Pensions, James Hay, Alliance Trust Savings and Dentons are four that have said they will offer it from tomorrow.