How to buy the right annuity for you

1) Find out what your pension provider will offer you

Six months before you’re due to retire your pension provider will send you a ‘wake up pack’ telling you how much income you will get if you buy your annuity from them. You’ll usually be able to get a better deal elsewhere. However, if you bought your pension during the 1970s or 1980s, you may have a ‘GAR’ or guaranteed annuity rate that you’ll be unlikely to match on the open market. The catch is you may have to retire on a specified date and may not be able to guarantee payments. If you don’t have a GAR, you at least have a starting point for your own research.

2) Shop around

The difference between the best and worst payouts is around 35%, according to the Association of British Insurers, so it’s essential you exercise your ‘open market option’ – this is your right to ditch your provider and shop around. Over a 20-year retirement on a £21,000 annuity, Hargreaves Lansdown reckons this could see you forgo £7,162. It’s easy to shop around with comparison websites. After answering a series of questions the site will come up with a list of the top-paying providers. Check a few sites as not all include every provider.

3) Decide how long you want to annuitise for

Lifetime annuities pay out until you die. However, if you aren’t happy tying up your money for life you could opt for a fixed-term annuity. “You choose the term and the final sum you want repaid to you and then we work back from there to work out what income we can offer you,” explains Vanessa Owen, head of annuities at LV=.

4) ’Fess up to any vices or health problems

Your comparison website will ask if you have any health problems or smoke. While these factors count against you with life insurance, they could do your annuity a big favour. Enhanced annuities pay more to individuals with medical problems or habits that give them a shorter life expectancy. According to figures from LV=, a 65-year old smoker with a £100,000 fund would get £6,377 a year, while somebody with high blood pressure and cholesterol would get £5,826 a year. This compares with an income of £5,656 for a healthy non-smoker.

5) Think about your dependants

Before you buy your annuity, think about anyone that relies on you for money. Once you have died, how will they pay the bills? Joint-life annuities ensure your income won’t stop until you’ve both passed away. You can opt for 100% of income to be paid, or select a lower proportion such as half or two-thirds. Joint-life annuities pay a lower level of income than single-life annuities, but failure to protect a spouse could leave them impoverished if they don’t have other income once you’re gone. 

6) Do you want to protect your money?

When you die annuity payments stop, this means if you die early on in your contract huge sums of money may go straight back to your insurer. If you are concerned about not getting value for money you can plump for guarantees. These ensure payments will be made for a fixed period, irrespective of when you die. Prior to the pension reforms guarantees were capped at 10-years but now insurers can stretch to 30 years. Alternatively you can choose value protection which returns any remaining funds when you die.  Again both these options will reduce the income you receive.

7) Think about inflation

Often dubbed the ‘silent thief’, the power of inflation to reduce the spending power of your money should not be underestimated. Looking back over the past 25 years, the cost of goods and services has risen by 113.7% according to Office for National Statistics data. To put that into perspective, you’ll now need around £2,137 to replicate the spending power of £1,000 in January 1990. For this reason, you can choose an income that increases in line with inflation.

However, while this might seem sensible, they reduce the initial income you receive and you may have to live a very long time to get value for money. An investment-linked annuity may offer better protection from inflation. This is because your money remains invested giving it the potential to deliver a rising income. Your income however can fall if your investment doesn’t perform well, although most plans offer minimum income guarantees to provide a degree of protection.

Just how important inflation protection is for you will depend on how much of your total income your annuity accounts for. If you have other money invested or in an income drawdown plan, that should provide you with some hedge against inflation, making it less important than those retirees who are more reliant on their annuity.

8) Double-check your rate

Once you have found the insurer that will pay the highest income, structured in the way that you require, you’re ready to apply. However, if during the application process, you have made any changes, it’s important to go back to the market. With a different set of requirements, you may find another insurer will offer a better income.

9) Be certain of your choice

Currently, after an initial cooling-off period in which you can cancel your contract, your annuity will become irrevocable and you will not be able to change or switch your plan. George Osborne has proposed that retirees should be able to sell their annuities but this is still at the consultation stage and even if it does get the go-ahead, you may not get back the amount you anticipated.

10) Don’t discredit advice

You can get a good deal online, but don’t assume it’s free. Annuity brokers take a commission that reduces the income you’ll receive. This could be around 1.5-2.5% on a standard annuity rising to 5% for enhanced annuities according to the FCA. You can often get advice for a similar sum with the benefit of consumer protection if you’re mis-sold.

Use this pension calculator to see what you might end up with and how long your money could last.


Click here to read about how annuities are getting a new look.

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