Brand new figures from the Association of British Insurers have revealed that around 2 in 3 retirees do not shop around when purchasing an annuity product.
Earlier this year, new pension freedoms were introduced that, as well as opening up income drawdown to all and allowing freedom of access to pension savings, also aimed to assist pensioners in getting a fairer deal for their retirement income.
Despite this, people are not taking advantage of their open market option in order to search the whole market and get the best annuity deal on offer to them, believing the provider they’ve saved with will always offer the best deal or that they aren’t able to choose another annuity provider without complication.
An annuity provides a guaranteed income, sometimes for a fixed period but often for life in exchange for your pension savings.
Before the pension freedoms were announced, they were pretty much the only option for the majority of retirees. Income drawdown previously had restrictions on it meaning you were required to have additional income methods on top of your pension income to be eligible.
Because of this, annuities were derided by many, particularly as rates fell lower and lower over the past decade or so. But an annuity is still the only product that guarantees an income for life, and it is therefore the most sensible and secure retirement income option for many.
2 out of 3 people are not Shopping around
The Association of British Insurers’ official figures show that, during the first quarter of 2015, just before the pension freedoms were introduced in April, 6 out of 10 annuity customers were shown to simply accept their providers’ first offer – this is more people than the same period in 2014 (47%), despite the continued news coverage and heightened awareness of pensions matters in the run up to the pension freedoms’ introduction.
Your annuity rate is calculated by taking into consideration your age and life expectancy, the value of your pension fund as well as current gilt yields. The pension fund is then invested by your annuity provider, with them guaranteeing you your income based on the offered rate
But just because you’ve saved with a particular pension provider for many years, it doesn’t mean that they will automatically offer you the best rate available – and it doesn’t always pay to be loyal.
Calculating your Annuity Rate
An online annuity calculator will be able to give you a basic idea of what sort of rate you can expect, but a precise quote can only be offered by speaking to an annuity specialist directly, as rates fluctuate constantly.
The rate offered by your pension provider in the first instance will also only take into consideration some of the most basic circumstances that can determine your offer, and it’s usually just the information they have on file
Your annuity rate can be affected by:
- The size of your pension pot – how much your provider can invest will obviously make a difference to how much they can offer you.
- Your age – the older you are when you purchase the annuity, the more you’re likely to get as the provider will have to pay out for less time than if you’d purchased 5 years previously.
- The type of annuity you buy – there are numerous types of annuity and each will command different rates. Types of annuity product include: level, increasing, guaranteed, joint life and investment-linked.
- Your health – if you are in ill-health or have lifestyle factors that can impact your health (such as smoking), the provider will deem you to have a lower life expectancy than average and will likely offer you a better rate.
- Where you live – certain postcodes are deemed to have a better quality of life and higher average life expectancies than others.
Without providing all of this information, you’re likely not getting the best annuity rate available for your current provider
Get the Best Rate
When you start to consider an annuity, remember the following points:
- Don’t stay loyal to your provider.
- Consider whether you need an annuity immediately.
- Use an online calculator for a guidance quote.
- Speak with an annuity specialist to compare the whole market.
- Provide as much personal information as possible.
Taking the above into consideration will allow you to get the best available rate and enjoy a secure and stable income in retirement.