Buying an annuity

Shopping around for an annuity can increase your retirement income by as much as 30%

Buying an annuity is the most common way of turning all your pension savings, that you’ve built up over the years, into an income that will last you the rest of your life.

From April 2015 onwards you’ll also be able to withdraw as much of the money as you want when you reach 55, although it will be taxed as income.

Arranging an annuity is a complicated process, so it’s important to know what you need to do at each stage. And it’s vital that you shop around to get the best annuity rate, as you could miss out on a boost to your income if you fail to do so.

This guide explains the importance of shopping around, a step-by-step guide to buying an annuity.

Shopping around for an annuity

Why it’s so important

After deciding what level of income you need, you should shop around and compare rates. This is called using the ‘open market option (OMO)’.

This means you don’t have to take the pension offered to you by your provider, but can take your fund to another provider to get a higher rate.

Shopping around can increase your retirement income by up to 30%. Each year people throw away £1bn in pension income through not shopping around, so it’s important to read the advice on shopping around included in your wake-up pack.

You’ll also get access to a wider range of products, so you’re more likely to find one that suits you. For example, if you suffer from ill health, you could be eligible for an enhanced or impaired annuity.

Go further: Annuity Options, find out more about the different types of annuity and the right one for you

Step-by-step guide to buying an annuity

Step 1

Up to six months before you retire, your pension provider will send you a ‘wake-up pack’. This will tell you the value of your pension pot, the different annuity types available and the benefits of shopping around, rather than taking the annuity offered by their provider.

Your provider will have to state which annuity types it does and doesn’t offer.

Step 2

10 weeks before you retire, your pension provider will send you a follow-up pack. Neither this pack nor the wake-up pack will contain application forms for taking out an annuity. Follow-up packs stress the importance of making a decision.

Step 3

Once you’ve been made aware of your options, you can choose to take financial advice on what decision you should make. Your adviser should ask you:

whether you’re married or have a partner
whether you have any medical/lifestyle conditions
whether you’re concerned about your annuity losing value because of inflation
whether you’re taking any small pots as cash and whether you have any other pension pots

Step 4

If you don’t visit a financial adviser, your pension provider must make sure you’ve answered these questions.

Step 5

If you decide not to visit a financial adviser, you can shop around for your annuity yourself – doing this almost always gives you a higher income in retirement.

Step 6

Your potential provider will give you a personalised illustration of your annuity, including a quote, your options and why you should consider certain product types – such as an enhanced annuity.

Step 7

If you’ve used the OMO, then once you’ve decided which annuity you’d like, and which provider you’re going to purchase it from, your pension provider will release your funds to your new provider. Your annuity should be set up within 30 days.

Advised Vs non-advised

Buying an annuity is a big decision, so seeking help from an independent financial adviser is a good idea.

Advisers research the annuity market for you, and make a recommendation based on your goals. They will contact your current pension provider for your policy information, and ensure that your funds are transferred quickly. If you would like to take advice then you can contact our sister company by clicking here.

However, you can also go down the non-advised route, which is cheaper than taking advice. The key word here is ‘information’. A non-advised broker will tell you about the different types of annuity and show you how to compare your options. None of this information will be tailored to you – it will be general.

As part of the major changes in the annuity market in April 2015 consumers will get a ‘right to guidance’ at retirement to help them make the complex decision about what to do with their pension savings. This free guidance is going to be impartial, will cover the individual’s range of options and will be face-to-face.

When not to shop around

Shopping around may not be the best option for a few people. If your annuity operates a guaranteed annuity rate (GAR), find out what it is – these can be as high as 10%, which is higher than any rate you could find on the open market.

In these instances, you should stick with your pension provider.

Shopping Around