Around 350,000 people will retire in Britain this year, the vast majority of whom will at some point have to buy an annuity with their pension pot to see them through their twilight years.
But what many of these retirees still do not realise is that they have the right to shop around for this – and unless they do, they could end up making the most expensive mistake of their lives.
An annuity is an agreement with an insurer. In exchange for your pension fund, the insurer guarantees you a regular annual income – the bigger the pension pot, the higher the income. Payments are also affected by factors such as your age, sex and general state of health, and whether you opt for the annuity to be inflation-linked or not.
The main point to remember is that, unlike other financial products, an annuity can’t be exchanged for a better one at a later date. You are stuck with it until you die.
Despite this, more than half of those who retire each year simply accept the first annuity offered to them by their pension provider. But this is costing them dear. “I estimate that consumers are needlessly missing out on approximately £400m each year in the UK,” Nigel Callaghan of Hargreaves Lansdown tells the BBC.
And you can’t necessarily depend on your independent financial adviser to remind you to shop around. Most IFAs are, in effect, paid to discourage you from looking for a cheaper option. IFAs typically stand to collect a 1% commission from your pension company once you retire – but only as long as you don’t switch to another provider, says Callaghan. “£40m is being paid to advisers for doing nothing.”
So for your own sake, shop around. Pensions expert Ros Altman tells The Mail on Sunday that there are various points you should consider before buying. Before you do anything, take your cash-free lump sum from your pension pot – most people can extract 25%. This is far more flexible and better value than spending it on your annuity.
Then, check whether you are eligible for an impaired life annuity – if you are in poor health or are a smoker, and thus may not live as long as a typical person that age, you should be able to claim a bigger payout.
According to The Times, research suggests that as many as 30% of retirees could be eligible. Also consider whether you need the annuity to cover your spouse too – if you’ve been the main breadwinner, then your partner could be left with a greatly reduced standard of living if your annuity dies with you.
Several companies offer services that can point you in the right direction for getting the best annuity, including the Annuity Bureau, Annuity Direct and Williams Burrows Annuities.