Annuity rates vary from one lifecompany to another, so you should always make sure you shop around to get the best deal available for you. This can be done by speaking to an Independent Financial Adviser (IFA).
When are you able to shop around?
Your pension provider should send you information between four to six months before you are due to retire, setting out what they will offer you based on the value of your fund and your age. They will also tell you that it is possible to shop around for a potentially higher annuity. About six weeks before you retire your pension provider should give you an estimate of the value of your fund. You can use this to compare products from other providers. This is known as your open market option.
- You should never assume the same company with which you built up your fund will automatically offer you the best rate. You may do better to shop around and check whether another company could offer you more. The annuity rate you get can affect your income by hundreds of pounds a year for the rest of your life.
- It may be impossible to change your lifetime annuity provider after you’ve bought your annuity, so take some time to choose the one that’s right for you
- Check what your existing provider offers
- Before shopping around, make sure you understand what your existing provider is offering you.
- Check whether your provider offers a guaranteed annuity rate. This is not the same as a guarantee period. A guaranteed annuity rate means that the provider has to offer a minimum annuity rate for your pension fund. Now that annuity rates are a lot lower than in the past, a guaranteed annuity rate can be very valuable and could give a higher retirement income than can currently be bought on the open market;
- Check whether your provider will charge you by way of penalties if you buy your annuity from another company
- Your existing provider will usually give you a quote for a specific type of annuity. Make sure you get a quote for the type of annuity you want, not just the one the provider offers you
- You can receive annuity in many different ways such as single or joint life, level or escalating, different guarantee payment periods.
Shopping around for your annuity
1. Get an estimate of the value of your pension fund, taking account of any charges, from your provider.
2. Decide whether you want to take a tax-free lump sum, and if so, how much (usually up to a 25% of your fund). If you decide to take a tax-free lump sum, deduct it from the pension fund value your pension provider gives you.
3. Decide whether you want a single or joint-life annuity. If joint life, whether the pension paid to your partner is paid in full or reduced level or escalating annuity
4. Think about whether you want your annuity to continue to be paid for a specific number of years (5 or 10), should you die shortly after you buy it.
5. Does your fund need to be a certain size to qualify for the better rates offered by another company? Some firms may not be interested in providing an annuity for small sums.
Annuity rates are based on 3 main factors. Your age, the size of your pension fund, and your life expectancy. It is very important to consider your lifestyle and health when considering your retirement income. This can have a major impact on your annuity income. You could receive a much greater income simply by completing a health questionnaire. This will then allow the annuity provider to calculate what they consider your own individual life expectancy to be. They can therefore offer you a better rate based on this if they feel this may be shorter than the average similar aged individual with a different lifestyle to you
The health questionnaire will cover such things as:
• Are you a smoker? If you are, you may get a better rate from some annuity providers.
• Do you have a medical condition that could reduce your life expectancy? If you do, you may get a better rate from some annuity providers.
All this can be quite complicated so you should seek professional advice from a Independent Financial Adviser before making any decisions on drawing an income from your Pensions Plans. It should also be pointed out that buying an annuity is only one option you may want to consider.
Below is an example of the difference you can receive by using the open market option when drawing the benefits from your Pension plan.
This example is based on Mr Jones, a male aged 65.
The basis of the annuity is a single life annuity, paid monthly.
The fund size is £200,000 and he wishes to take the maximum tax free cash available:
£200,000 less 25% tax free cash = £150,000 which is used to purchase his annuity.
The best annuity available at this time for Mr Jones is £9926 gross per year.
However during the meeting, with his Independent Financial Adviser. Mr Jones completed a health questionnaire, which established that he is a smoker and suffers from high blood pressure.
The Adviser was then able to use this information to increase Mr Jones annuity by 15% up to £11,647 gross per year.
This is an example of the type of increase that can be achieved by always making sure you shop around when considering taking the benefits from your Pension. They are not maximum or minimum amounts and the rate you will receive is dependent on a lot of factors combined so speak to a Independent Financial Adviser before making any decisions.