Top 5 Most Important Pension Annuity Facts
Buying a pension annuity can be a daunting prospect for some, indeed most people. There is a huge gap in people’s knowledge of annuities, with the majority of potential annuitants not knowing which annuity will suit them best. Moreover, many will not have come across the concept of an annuity as it is only something you tend to look for once in your life! Unfortunately this lack of knowledge and understanding over what an annuity is and how you go about purchasing one, leads many to simply accept the annuity offered by their current pension provider. Some have the misconception that buying an annuity is like buying bricks, they are basically all the same wherever you buy them. This couldn’t be further from the truth, in fact annuities vary in type as well as from the various providers who sell them.
But shopping around isn’t just desirable, it is vital if you want to receive the best deal. Not shopping around could cost you thousands of pounds in lost retirement income every year, in fact according to the website rightannuity.co.uk “…the Treasury has confirmed that 60% of those taking an annuity from a personal pension do not use the OMO (Open Market Option). In addition, 40% per cent of insurance companies information packs do not even meet the FSA’s minimum requirements under Treating Customers Fairly (TCF).” Some have estimated that up to £1 billion could be lost every year due to annuitants failing to shop around.
There are literally thousands of pages of literature that you could read up on about pension annuities, but we have compiled the top 5 most important things you should be aware of when buying an annuity
1. What is an annuity?
A pension annuity can be defined as a financial product sold by an insurer, pension provider or other financial services organisation. You as an annuitant hand over your pension pot to this company who then offer in exchange a tax free lump sum (usually 25% of the total) and then pay you regular payments until an event, such as you or your partners death. There are dozens of types of annuity, but the most common tend to be conventional annuities, where the income payments are fixed until you pass away.
2. Do I have to buy one?
You do not have to buy an annuity if you don’t want to, but the latest age at which you can buy one is 75. If you don’t choose to buy one at 75, you can opt for an Alternatively Secured Pension. This is a hot topic of contention at the moment, with many within the pension finance industry arguing that this cap should be raised to 80 or abolished altogether. This 75 age limit may change soon as the Conservative Party have pledged to scrap the 75 years age limit on annuities. The reason why people do not wish to buy annuities are varied but a common reason is that annuity rates have been falling steadily for the past 15 years and so buying an annuity is becoming increasingly less attractive.
3. Which pension provider should I use to buy an annuity?
The answer to this question is simply from whomever offers you the best rate and it is worth noting that this is in most circumstances NOT your current pension provider. Although sticking with your current provider may seem easier and more convenient, it could cost you financially in the long run. Once you have become au fait with what an annuity is you should try other pension providers to see who has the best deal. They do not all offer the same product at the same rates, some are specialist in some areas. For example some providers are better with large pension pots whilst others cater for small pension pots. One common mistake is that many retirees are offered the aforementioned conventional or level annuity when they are actually eligible for enhanced rates. If you have an illness or have previously had an illness that could impact on your life expectancy then you should check if you are eligible for enhanced rates as these will pay you a higher income. This is also true if you drink heavily or smoke a lot.
4. What are the alternatives?
An annuity is not for everyone, in fact their popularity seems to be waning with many IFA’s seeming to veer away from advising in their favour. This is because of the steady fall in rates over recent years, which has lead many to look for other, better value savings options. Within the pension annuities market there is plenty of choice such as a with-profits annuity where as well as receiving an income, you also “speculate” a portion of your pension pot on various investments in the hope of higher annual annuity payments. Aside from annuities, you can opt for what is known as income drawdown / unsecured pension. This is a way of keeping your pension pot invested whilst also drawing an income each year, particularly suited to those who are already financially stable and have large pension pots, typically of over £100,000. You can only do this up to age 75 when you must buy an annuity or opt for an Alternatively Secured Pension (ASP).
5. Where do I start the hunt for an annuity?
Well the first port of call should be your current pension provider who will send you an information pack prior to your planned retirement date. This will detail your options and introduce what products they have on offer. Our advice is find out which annuity is likely to suit your needs best and then do some research into which provider can best provide this. This can be done by either using a broker or by approaching the individual pension providers – you can find them online.
