1. Shop around. Don’t just buy an annuity from the first insurer that sends you a quote. The Money Advice Service offers a comparison tool. This also includes helpful videos that explain the different choices you will have. Further guidance is available from the government’s Pension Wise site.
2. Tell your insurer, adviser or broker about any medical conditions you have or medicines you take. If you are a smoker, tell them about that too. People have been conditioned into thinking that telling insurers about their bad habits and medical conditions will usually result in higher premiums. But in the case of annuities, poorer health can lead to higher income payments.
3. If you do qualify for an enhanced rate of income due to medical conditions, go through underwriting with more than one insurer. Underwriting is the process that insurers follow to assess risks – in this case, making a judgement about how long they think someone will live based on medical and other facts. The initial quotation will only be indicative and the actual income you receive won’t be known until underwriting has been completed. It’s possible an insurer who offers a lower indicative quotation may end up providing the best rate after underwriting has been completed.
4. Some older pensions include a guaranteed annuity option. This converts your savings into an annuity at a special rate, usually much higher than available in the market. If your pension includes a guaranteed annuity option and you want to buy an annuity, you should compare the rate the option offers to the rates available in the market.
5. Think twice before transferring a pension with a guaranteed annuity option in order to take income withdrawals from the fund. Although taking income withdrawals from the fund may be your preferred option, the guaranteed annuity can be worth a lot more than the transfer value you will receive.
6. If you use a broker, the broker may not actually provide advice. Their service may be limited to shopping around on your behalf. If you want advice, then make sure you are dealing with a regulated financial adviser that will provide a personalised recommendation.
7. A broker that does the shopping around on your behalf, may not be shopping the whole market. Ask them if they shop the whole market and, if not, which insurers they include or exclude.
8. Don’t forget about your spouse or partner. It’s surprising how many people forget to ask for their annuity payments to continue to be paid after their death to their spouse or partner. You can choose for the annuity income to be paid at the same rate or a lower rate than you were receiving. If you do ask for an income to be paid to your spouse or partner after your death, then the initial rate of income paid to you will be a bit lower than if the annuity is just for yourself. If your spouse or partner has their own independent source of income that is enough to meet their needs after your death, then choosing this option may not be necessary.
9. Think about inflation. Although we have lived through a period of relatively low inflation for the last 15-20 years, remember that your retirement could last 25 or 30 years, during which a period of high inflation may occur. High inflation rates can reduce your spending power rapidly. For example, between February 1989 and March 1992, the Consumer Prices Index remained above 5%, peaking at 8.5% in April 1991 (A). If you had £100 in February 1989, the spending power of that money had reduced to only £82 by March 1992 and would have felt like losing a fifth of your pension over only three years. Adding inflation protection to your annuity income will result in a much lower initial income, which puts a lot of people off the idea. Alternatively, you can add a fixed rate of increase, which may not reduce your initial income by as much as an inflation-linked annuity, but this will depend on the rate of increase you select.
10. If you are worried about losing your savings if you die early, think about adding guarantees. You can add a money back guarantee to your annuity, which pays your estate the purchase price less the instalments received to your date of death. You can also add guarantee periods of up to 30 years, meaning that your annuity continues to be paid after your death for the remainder of the guarantee period. Guarantees cost money, so expect a lower initial income if you choose either of these options.
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