YOUR choice of annuity is one of the most important financial decisions you will ever make; once you have bought one you cannot change it.
Rising life expectancy and tumbling gilt yields have hit annuity rates hard – making it imperative that you do everything possible to make the most of your pension pot.
Keith Mackie, a certified financial planner at Acumen Financial Planning, offers his top tips on finding the best annuity.
1 KNOW YOUR OPTIONS
Firstly, check whether you should be buying an annuity in the first place: this might not be your best option. It is possible to leave your retirement savings invested and draw an income from them, what is known as drawdown. The suitability of this will depend on the size of your pension fund, family circumstances, attitude to investment risk and whether or not you have other pension income.
There are various types of drawdown – such as “capped” and “flexible” drawdown – but this option is generally suited to those with sizable pension funds.
2 REVIEW YOUR INVESTMENTS
Over the years you will probably have been invested in different types of funds. As you approach retirement you should think about how your pension funds are invested and consider switching into assets that are less likely to fluctuate in value; this will help to protect the retirement savings you have built up. This increases in importance the nearer you are to accessing your benefits.
3SEARCH THE MARKET
The golden rule of buying an annuity is to never accept the annuity being offered by your pension provider without first shopping around; use what is known as the “open market option”.
Other annuity providers may well offer you a higher annuity rate and possibly more options than the company you’ve saved your pension with.
4 ENHANCE YOUR INCOME
Many people qualify for a higher annuity rate if they are in poor health, so check if you qualify for an enhanced or impaired life annuity. Even if you are a smoker (generally more than ten a day) you may be eligible for an enhanced annuity. Believe it or not, this could boost your pension income by up to 40 per cent.
5 CONSIDER YOUR SPOUSE
Do you need a single or joint life annuity? This, of course, depends on whether you have a partner that you would want to provide for after your death.
If you choose a single annuity, the income you receive will stop if you die before your partner. With a joint life annuity, the income will continue for your partner beyond your death at a level selected at the outset.
6 GET A GUARANTEE
Having bought an annuity, there is the unfortunate possibility that you could die early and the annuity could end, with most of the fund being wasted. It, therefore, makes sense to buy an annuity with a guarantee – usually for five or ten years – to ensure that, even if you die prematurely, your beneficiaries can still get some benefit.
The additional cost of adding a guarantee for ten years instead of five is usually negligible, so it’s worthwhile looking into this.
7THINK ABOUT INFLATION
Would you like your annuity to increase in line with inflation? As a rough rule of thumb, if you select an increasing annuity, it takes around 13 years for the amount to reach the same level you would have been given at outset, had you chosen a level annuity.
Some people prefer to have the higher amount now, but protecting your retirement income against the ravages of inflation gives peace of mind that your buying power won’t be eroded over time.
8 STAY INVESTED
Could you stomach some investment risk with your annuity? Investment-linked annuities generally invest your money in stocks and shares, thereby giving the potential for investment growth to provide higher income payments in the future.
Of course, there are no guarantees: the investment might fall in value or fail to grow at the rate you expected. If this makes you feel at all uncomfortable, stick to conventional annuities.
9 GO FOR FINANCIAL STRENGTH
Look at the financial security of your potential annuity provider. Visit a rating agency’s website and search for the insurance company. Review information relating to the financial strength of the provider, as well as customer feedback ratings. Make sure that you are comfortable with the provider’s overall situation before proceeding.
10 TAKE ADVICE
If you want to find the best annuity, you need professional advice. An appropriately qualified independent financial adviser or financial planner can go through all of your options and shop around for you.