You can now spend your pension as you wish, but with 43% of 50- to 65-year-olds still planning on buying an annuity, plenty of retirees still want guaranteed income
Whether you are using all, or just some, of your pension to buy your annuity, it’s best to feel sure you’re making the right choice by following our 10-step guide.
1 Talk to your provider
Contact your pension provider to get an up-to-date annuity quote first. You will 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 – which you will be unlikely to match elsewhere.
The catch is that you may have to start taking benefits on a specified date and may not be able to arrange additional benefits such as guaranteed payments after you die. 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 4.5%, according to Hargreaves Lansdown, so it’s essential you shop around. You might not think the difference sounds much, but over a 25-year retirement it could rack up to £5,750 in lost income on a £100,000 annuity.
In March 2018, the FCA introduced new rules forcing annuity firms to tell people how much better off they could be if they shopped around.
In addition to telling you what income they will pay, annuity providers are obliged to tell you what the best available rate is on the open market.
It won’t tell you which provider is supplying that rate or take details of your health into account, so it’s a nudge to encourage you to do your own research rather than replacing it altogether.
Shopping around is easy with comparison websites. After answering questions, the site will offer a list of the top-paying providers. Check a few sites as not all include every provider. Start with the Money Advice Service at Moneyadviceservice.org.uk.
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, then you could opt for a fixed-term annuity.
You can choose the term and the final sum you want repaid to you and then a provider works back from there to see what income you can get.
However, fixed-term annuities are not available from every annuity provider.
4 Admit to any vices or health problems
Shopping around will boost your income, but it isn’t the end of the road. The vast majority of retirees could also increase payouts by getting an enhanced annuity. These pay more to individuals with medical problems or lifestyles that give them shorter life expectancy.
Admit to all your vices and health problems and you could significantly increase your retirement income. A 65-year-old smoker with high blood pressure and high cholesterol and a £45,000 fund would get £2,872 a year – that’s almost 17% more than they would get if they had a standard annuity; while someone with a serious impairment could get 68% more income.
More than half of retirees could be eligible for enhanced rates, but don’t take up smoking now just to get a better rate. You need to have been smoking long enough for it to seriously impair your life expectancy in order for it to boost your annuity income.
5 Think about your dependants
Before you buy your annuity, think about anyone who relies on you financially. 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. 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’re concerned about not getting value for money, you can buy guarantees. These ensure payments will be made for a fixed period to named beneficiaries, irrespective of when you die and can stretch for up to 30 years. Alternatively, you can choose value protection, which returns any remaining funds when you die. Again, both these options will reduce your income but provide valuable peace of mind.
7 Think about inflation
Often called the ‘silent thief’, inflation’s ability to reduce the spending power of your money should not be underestimated.
Looking back over the past 30 years, the cost of goods and services has risen by 166% according to Office for National Statistics data. To put that into perspective, you’ll now need around £2,497 to replicate the spending power of £1,000 in November 1988. For this reason, you can choose an income that increases in line with inflation.
However, this will reduce the initial income you receive and so you may have to live a very long time to get value for money.
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 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. Payments on your final salary pension will also increase in line with inflation, as will your State Pension.
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 you have made any changes during the application process, it’s important to go back to the market. With a different set of requirements, you may find that another insurer will offer you a better income.
9 Be certain of your choice
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.
Given that you will probably be handing over a sizeable chunk of your retirement savings, make sure that you completely understand the annuity you have chosen, and are certain it is the best product for you.
10 Don’t discredit advice
Buying an annuity is a major decision that will affect your income and financial security for the rest of your life. There are few times in life where it is more important to get professional advice. It may seem pricey, but if an independent financial adviser can help you increase your retirement income it could definitely be worthwhile.
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% to 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 in case you are missold.
This feature first appeared in our annual publication Retire In Style. Note, annuity rates correct at time of original publication - January 2019.