Retirees delaying their annuity purchase to age 75 and beyond are at risk of missing out on a substantial amount of extra income if they fail to compare rates across providers.
The difference between the best and worst annuity rates is significantly greater at age 75 than at age 70 or 65, according to retirement specialist Just Group. It claims that a healthy 75-year-old can receive about 17% more income from the best annuity provider compared to the worst. The gap between the best and worst rates is a hefty 14% at age 70 and 11% at age 65. Read more in our article Why it pays to shop around for your annuity.
These examples demonstrate why it’s vital not to automatically go for the annuity you’re offered by your pension provider. You should always exercise what’s known as your ‘open market option’, which essentially means you can shop around elsewhere. A financial advisor can ensure you make the right choice for you at retirement.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
Just Group’s calculations show that in income terms, a healthy 75-year-old buying an annuity with a £50,000 pension could expect to receive about £4,661 in income each year for the rest of their life from the most competitive provider, compared to £3,980 from the lowest rate. This is an annual difference of £681, or 17% more income every year, compared to a £342 (11%) difference between the income paid by the highest and lowest rates at age 65.
Stephen Lowe, group communications director at retirement specialist Just Group, said the gap between the best and worst rates at this age has been as high as 22% in the past year. He stressed that the figures highlight the importance of older annuity buyers in particular shopping around, as they are at most risk of losing extra income.
He said: “Improving returns have pushed up demand for annuities in recent months but buyers must do their homework to avoid the poor value providers and to secure the highest income possible. It means extra money every month for as long as you live.
“Annuities provide secure income so people have peace of mind knowing that they can spend what they receive without worrying if it will fluctuate or disappear during their lifetime.
“But there are no second chances when you buy an annuity – you must get it right, first time. That means disclosing health and lifestyle information so that the rate offered is personalised to your circumstances, then taking that information into the open market to see which providers are the most competitive. The better the deal, the more income you will enjoy for the rest of your life.”
Last year’s Financial Conduct Authority (FCA) ‘Financial Lives’ survey revealed that half of annuity purchasers failed to shop around for the best rates. More than one in two (52%) did not realise that stating their poor health meant they could receive a higher annuity rate, since the provider expects a shorter payment period.
Lowe said: “These high numbers raise concerns about the level of support retirees are receiving – this is the closest thing in the financial world to being given ‘free money’.”
Your options at retirement
Before pension freedoms came into force in April 2015, most people used their pension savings to buy an annuity when they reached retirement. When rules changed and people could do as they wish with their pension savings, buying an annuity was no longer the favoured option as rates had fallen to an all-time low. However, since rates have risen annuities have recently soared in popularity with many more people buying them at retirement. According to Legal & General, its annuity rates have jumped by 36% over the past two years.
You can buy an annuity from a wide range of providers if you want a guaranteed income either for life, or for a fixed term. There are several different types of annuities on the market and it’s important to both choose the most suitable one for you, and get the best rate possible, as an annuity is a once-in-a-lifetime purchase. Read more in our guide Annuities Explained.
You could also consider other annuity options like inflation-linked or adding death benefits for loved ones.
You may decide to mix and match different products to produce your retirement income. For example, you could buy an annuity with some pension savings and leave the rest in drawdown, or start with drawdown and buy an annuity later. Read more in our article Your pension options at retirement.
The downside of buying an annuity earlier is that the value of your pension savings will no longer be able to potentially grow through investment returns, so some people might choose to delay their annuity purchase until later. As you age, managing drawdown risks can seem less appealing than a guaranteed income.
If you’re taking early retirement and have a larger pension pot, you may want to consider buying an annuity which will provide you with an income until your State Pension kicks in, for example. Bear in mind that you can purchase multiple annuities during retirement if you want to.
Where to seek help
If you are unsure how to manage your pension savings, the Government’s Pension Wise service offers people aged 50 and above with free guidance on their pension choices at retirement. However, bear in mind that this service cannot provide you with personalised recommendations or advice.
If you’re considering seeking professional financial advice on the options available to you, we’ve partnered with nationwide independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
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