• Jaskarn Pawar

£130 million “lost” in retirement income because retirees aren’t shopping around


If you have a defined contribution (DC) pension, the only way to create a guaranteed income for life is to purchase an annuity. An annuity can create financial security throughout retirement, but research suggests many aren’t getting the income they could be because they’re not shopping around.


When you retire, there are several ways you can access your pension to create an income. An annuity is something you purchase with all or part of your pension from an insurance company. It will then pay a set income, either for life or an agreed number of years. In retirement, a lifetime annuity, which will pay an income for the rest of your life, can help to create certainty.


However, you shouldn’t purchase an annuity from the first insurance company you come across. Insurance companies will offer different annuity rates, and this will affect how much income you will receive. Shopping around for the best deal can help your retirement savings to go further.


For example, a 5% annuity rate will mean you’ll get £5,000 each year for every £100,000 you pay in. The higher the annuity rate, the more income you’ll receive. Many factors are taken into consideration when calculating annuity rates, from life expectancy to interest rates.


Shopping around could add thousands of pounds to your income


According to Pension Policy Institute (PPI) research, an individual could gain an extra £7,000 in income for each £100,000 in their pension throughout retirement simply by shopping around. PPI estimates that in 2019 up to £130 million could have been “lost” because retirees aren’t taking the time to find the best annuity rates.


Previous research conducted by PPI found that annuity rates offered by different providers could vary by up to 40%. If you purchased an annuity with a lower rate, your retirement income could be far lower than what it could be.


Taking some time to shop around and seek advice could mean your retirement is more financially secure and provide you with greater freedom. Yet, only half of people do so.


The number of retirees choosing to purchase an annuity with their pension has fallen since Pension Freedom was introduced in 2015. Increasingly retirees have been choosing to access their pension flexibly, but there is still a place for annuities in retirement planning. If you’re generally risk-averse and prefer to know exactly what income you’ll receive, using an annuity can provide peace of mind.


If you decide an annuity is the right option for you, make sure you shop around before committing to an offer.


Of course, it’s not just the rate offered that plays a role in whether an annuity is right for you. Among the other things to consider are:


  • The annuity term: As mentioned above, an annuity may provide an income for life or a defined period. For retirees that want income certainty, a lifetime annuity can make sense. This means it will deliver a reliable income for the rest of your life.

  • Maintaining your spending power: Over your retirement, inflation will affect the cost of living. If your annuity income remains static, your spending power will decrease. Over the long-term, inflation can have a significant impact on the retirement lifestyle you can afford. It is possible to purchase an annuity that rises in line with inflation to preserve your spending power.

  • Creating a joint income with your partner: A joint annuity can provide your partner with financial security too. If you pass away, a joint annuity will continue to pay an income to your spouse or civil partner. Usually, the income paid to a nominated person will be a proportion of the income you receive while alive.

An inflation-linked or joint annuity may mean the annuity rate you’re offered is lower, but these additional features can be valuable. It’s important to think about what your priorities are and your retirement finances over the long term.


Could you receive an enhanced annuity?


If you’ve been diagnosed with an illness or have other health problems that could affect your life expectancy, you could receive a higher retirement income. This is known as an “enhanced annuity” or “impaired life annuity”. Health problems that could mean you receive a higher retirement income include diabetes, high blood pressure and cancer. In some cases, lifestyle choices, such as smoking, can also mean you get a higher income.


PPI estimates that people who qualify for an enhanced annuity could receive an extra £800 each year for each £100,000 they pay into an annuity if they shop around. However, many people don’t realise they could be eligible for an enhanced annuity. PPI estimates that between 39% and 48% of people who brought a standard annuity from their pension provider in 2016 may have had health or lifestyle conditions that made them eligible.


You’ll be asked medical questions before you’re offered an enhanced annuity rate. Your doctor may be asked to provide further information, or you may have to attend a medical examination.

Is an annuity the right option for you?


Annuities can be used to create long-term financial security in retirement, but they’re not the right option for everyone. You cannot change your mind after buying an annuity, so it’s important to explore all your options first. Remember, you don’t have to use your entire pension to purchase an annuity. You could use a portion of your pension to purchase an annuity to create a base income and access the rest flexibly.


We can help you go through your pension options or find the right annuity deal for you. Please contact us to discuss your retirement plans.


Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

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