Pensioners looking to boost their retirement income through annuities are being warned of a potential mistake that could cost them dearly. Experts warn that not shopping around for the best rates could result in a loss of up to £14,500 over a 20-year retirement period.
Annuities are retirement plans that pensioners can buy to get a fixed regular income for the rest of their life. Buying an annuity is usually an irreversible decision, so it’s crucial to consider your options, choose the right type and get the best deal you can.
Rates are usually shown as how much money you’ll get per year for every £100,000 you pay in. For example, an annuity rate of 5% would mean you’ll get £5,000 for every £100,000 you invest – so if you paid an annuity provider £50,000, you’d get £2,500 a year.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown told The Sun: “An annuity is for life, or at least your life in retirement.”
“Once bought you can’t unwind it, so if you make the wrong decision, you could regret it further down the line.”
Data from Hargreaves Lansdown shows that a 65-year-old with a £100,000 pension looking for a single life level annuity with a five-year guarantee can get anything between £6,532 and £7,255 per year depending on which provider they go with.
That’s a whopping £723 per year difference. Over the course of a 20-year retirement, this could add up to £14,500 less retirement income.
The different types of annuities that are available include:
*
Single life annuity:
This pays out an income for the rest of your life, but stops when you die.*
Joint life annuity:
This pays out an income for the rest of your life and your partner’s life, but stops when the second person dies.*
Guaranteed annuity:
This guarantees that you will receive a fixed income for a set number of years, regardless of when you die.*
Enhanced annuity:
This pays out a higher income than a standard annuity, but is only available to people who have health or lifestyle conditions that reduce their life expectancy.Which type is best for you depends on lots of things, such as what other retirement income you have, whether you have a health problem, and what your appetite for risk is.
“With these kinds of figures in the mix you don’t want to take the chance that your provider happens to offer the best rate – it’s well worth taking the time to check what else is out there,” Helen explained.
It means that shopping around for the best rates is key to boosting your savings and making sure you’re not losing out.
The differences between the best and worst rates get even bigger when you bring health into the equation. A 65-year-old who discloses that they smoke ten cigarettes a day could get as much as £7,507 per year. If you suffer from a condition such as diabetes, then you could get several hundred pounds per year more, Helen said.
That’s because your health is linked to your life expectancy. If you’re in poor health, smoke or have another lifestyle condition, you’ll be expected to live for a shorter time, so you’ll get a better annuity rate.
Helen said: “Many people may feel uncomfortable disclosing these details as they think they will be penalised.”
“However, it is vital you put as much information as you can on the form as it could make an enormous difference to the income you receive long-term.”
YOUR retirement income and whether or not you should buy an annuity will depend on:
* Your age
* Your health
* Your lifestyle
* Your other retirement income
* Your attitude to risk
Up to six months before you retire, your pension provider will send you a “wake-up pack”. This will tell you the value of your pension pot, your pension options, the different annuity types available and the benefits of shopping around, rather than taking the annuity offered by their provider.
If you decide not to visit a financial adviser, you can shop around for your annuity yourself – doing this almost always gives you a higher income in retirement. You can use tools such as the Money Helper’s annuity comparison tool, or use annuity brokers to find the best deals currently available in the market, and tailored to your circumstances.
If you so wish, you could close your pension pot and take it all as cash. But this will not give you a secure retirement option. It could also land you with a hefty tax bill. Tread very carefully and seek advice.
Note that you are not limited to picking one option. You can mix and match as suits your needs. This might, for example, involve using some of your pot to purchase an annuity, while leaving the rest invested and drawing an income from it. In many cases, a combination can work well.
