When you enter retirement you need to use the pot of money you have saved over your working life to provide an income to live on. Generally people buy an annuity from an insurance company with their fund and gain an income for the rest of their life. This annuity is basically an insurance policy and your pension income is a combination of your pension fund value and the annuity rate you get. Annuity rates depend on an assessment of your life expectancy and whether you want your pension income passed to your spouse in the event that you expire first.
The way the annuity provider makes its money is that it gambles that you will die before you have used up all your pension fund. A healthy female non-smoker will therefore get a lower income from an annuity than a smoking man of the same age. This is because analysis of life expectancy will generally conclude that the woman will likely live longer.
Annuity rates are therefore affected by gender, lifestyle and other factors affecting life expectancy. On top of this, annuity rates are changed depending on the general economic climate and stock market. This is because the annuity provider will need to be able to use your funds to provide your income and in more favourable climates will be more confident that they can meet more generous income payments.
There are alternatives to annuities at retirement. Income drawdown and part-annuities provide different vehicles. In addition, the open market provides different annuity rates. For this reason it is important to shop around for the right vehicle at retirement. An IFA can help you look into this. Current legislation dictates that you will need to buy an annuity by the time you reach 75 years of age.