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Consumers with smaller pensions funds have comparable lifetime gains on annuities regardless of whether they are purchased internally or externally, research by the ABI has revealed.

Predicting rising demand for pension annuities due to increases in the number of maturing defined contribution pensions, the 36-page document examined concerns people were not using the open market option to shop around for annuities and also looked into the combined effect of low gilt yields and longevity on annuity rates.

The report estimated two-thirds of consumers shopped around with the same ratio of personal pension annuities being sold internally. However, those doing so had a smaller average pension fund of £13,000 than those who purchased externally (£24,000). Of all annuities bought in 2006, 23 per cent had a fund value of less than £5000 and 41 per cent had a value of less than £10,000.

As annuity providers commonly set minimum purchase prices on external sales, consumers are likely to be limited in their choice of providers and potential gains.

Almost half who purchase their annuity internally have pension funds of under £10,000 yet 85 per cent of customers purchasing a single-life annuity do so at a rate of at least 95 per cent of the highest external rate.

The report attributed declining annuity rates to an increase in longevity and a drop in gilt yields, stating they were low by historical standards.

Lifetime gain for a male aged 65 buying a conventional single life annuity with a 5-year guarantee

Source: ABI Research Paper

Scott Brown, head of annuities for Aviva, admitted people with a smaller pension pot did have a very limited choice, however, he said purchasing an annuity was more than just looking at the headline rate.

He said: "For those with a small pension fund, buying externally means the difference of pence and not pounds as the provider needs to cover its costs.

"However, a consumer should not just look at rates. Single annuity may not be the best choice for everybody and a person must always examine how each product fits in with their lifestyle and expectations, for example, with a joint annuity or enhanced annuity.

Andy Tully, marketing technical manager for Standard Life, said the report showed people were doing well from their annuities although he said the FSA should look into providing comparison tables to make matters easier for consumers.

He said: "It is pleasing to see people are not penalised for choosing a particular purchase route yet I would say the industry needs to ensure customers get access to their money quickly. In this area, I think the sector could improve."