Four top tips for buying an annuity
1. Do I have to take my annuity from my existing pension firm?
No. You’re free to shop around to get the best annuity for your needs using the “open market option”, giving you a chance to get a higher income from your pension savings. A good place to compare different annuities is www.moneyadviceservice.org.uk. However, our research shows two thirds of retirees still take the first annuity offer put to them from their existing provider, whether due to apathy or just not understanding what else is on offer.
2. What type do I need?
Conventional level annuities are the most commonly used, providing an unchanging guaranteed income for life. However, as the decision to purchase an annuity is a one-off and the income level can’t be changed once purchased, you should think carefully before committing to as you might be unable to pass pension savings on to family and dependents. One alternative is an inflation-linked annuity that starts at a lower level but rises over time. If you’re prepared to accept some risk, investment- linked annuities may allow you to grow your income. The converse is also true, however, as falls in investment values will may also reduce your income level.
You don’t have to stick to one option. Often a mix of income types generates the maximum level of income with the required level of flexibility.
3. What other benefits are available?
Joint life annuities offer the peace of mind of knowing that your partner could continue to receive a pension income. Guarantees can also be built into the annuity e.g. for a period of five or ten years, ensuring that your partner or anyone else that you nominate would receive the balance of the guarantee should you pass away during the guarantee term.
It’s always worth checking to see if you’re eligible for enhanced annuity rates. These are based on your lifestyle and/or any existing medical conditions and usually pay an income above that available from conventional annuities. As a result, smokers and people with even very minor medical ailments can receive higher pension income than they would otherwise receive.
4. Are there alternatives to annuities?
Income drawdown is an option for larger pension pots, provides a regular, flexible income from your fund whilst keeping it invested. There are various options and they carry risks, therefore seeking advice is important. It may be the most important financial decision you’ll ever make.
• Colin Campbell is manager at Mazars Financial Planning