How To Choose An Annuity [The Expert’s Guide To Making The Right Decision]

Anthony Burgess (Pension & Investments)

Written by Anthony Burgess (Pension & Investments) on July 25, 2018

Updated June 6, 2019

Choose the right annuity

When it comes to choosing an annuity, it is vital to shop around to find the best deal. Annuity rates and terms can vary massively, so while accepting the first offer you are given can be an easy option, it will rarely be the best annuity deal out there. This guide will help you make the right decision when choosing the best annuity deal for your future.

Is an annuity right for me?

An annuity is an agreement with a life insurance company or another annuity provider. You use your pension pot or other life savings to buy the annuity. In return, the annuity provider will pay you a regular income throughout your retirement.

An annuity can be a great way to turn the pension that you have been saving for over your working life, into an income that will last the rest of your life. Annuities used to be a requirement for retirement until recently when pension regulations were changed. Since the change, the popularity of annuities has decreased as more and more people are finding other alternatives to finance their retirement.

The amount of money you can get from an annuity is determined by how much you pay in and the rate the annuity provider offers you. Individuals with medical conditions will usually be offered a higher rate than a healthy individual that is likely to live for many years.

There are a number of options available when it comes to buying an annuity, and it is important that you choose the right one for you and your individual circumstances. There are a few factors you need to think about when deciding which annuity, if any, is the right option for your future. These factors include whether you have any dependants, whether you want to be protected against inflation, if you wish to leave any inheritance after your death and how much flexibility and control you want over your payments.

Annuities are irreversible. Once you have agreed to an annuity, you have no option to change your mind at a later date. It is vital to make sure you are 100% certain that an annuity is what you want for your future before committing to a lifelong agreement.

Why should I shop around for an annuity?

Once you have decided if an annuity is right for you, the type of annuity you want and the level of income you will need for your retirement, you will need to shop around and compare rates to make sure you find the best deal.

Your current pension provider will most likely offer you a deal for an annuity, but you have no obligation to stay with them and have the freedom to look for better deals from other providers. In the majority of cases, the first deal offered for an annuity is not going to the best rate you can get, and as your annuity is going to be your source of income for the rest of your life, it is so important to get the most for your money.

Recently, there are fewer providers offering annuities to the open market, so the number of options available is decreasing, but that doesn’t mean you shouldn’t still be looking for the best rates out there. Shopping around for a better annuity rate can increase your retirement income by up to 30%, and every year an estimated total of £1bn in pension income is lost by individuals not shopping around. With this in mind, it is essential to look at all the products available to you and your situation before making any decisions. For example, smokers or overweight individuals could be eligible for an enhanced annuity.

As you reach your retirement age, your pension provider will most likely contact you with an annuity quotation, and it is essential to keep this in mind while also shopping around for other options. As with most financial products, the only way to find the best deal is to compare all the options available to you.

When your pension provider sends you an annuity quotation, your provider will also send you information on the value of your pension fund which can be used to compare annuity rates. You shouldn’t just dismiss the offer from your existing provider, as in some cases it could be the best deal you can get, especially for those with older pensions that offer a Guaranteed Annuity Rate (GAR). A Guaranteed Annuity Rate can be much higher than the annuity rates that are available on the open market.

Keep in mind that an annuity is often a gamble. If you live a long and healthy life after buying it, you could end up better off. However, if you pass away soon after purchasing an annuity, all your life savings will be lost.

How to buy an annuity

Navigating your way around the various annuity options out there can be complicated and overwhelming. To help choose an annuity that properly meets your needs and gives you the best possible retirement income, follow these simple steps:

Step 1: Pick the type of annuity you want

Choosing an annuity is not only about getting the best value for your money and the best rates but also about what you want to gain from your retirement income. There is a range of different annuity types out there that each has different benefits and features. It is essential to properly understand all the types of annuities available to you so you can make an educated decision on which is best for your future. The main types of annuities are:

  • Level Annuities: This will pay out a flat amount of income every year for the rest of your life.
  • Escalating Annuities: This will pay out an increasing amount of money every year for the rest of your life in order to protect you against rising inflation. Often, they are increased in line with the Retail Prices Index (RPI).
  • Joint Annuities: This type of annuity will pay you an income for the rest of your life, and then after your death will continue to pay an income to your partner until they pass away.
  • Guaranteed Annuities: This will pay out your retirement income for a predetermined number of years even if you pass away in this time frame.
  • Fixed Term Annuities: As the name suggests, this type of annuity will pay out for a fixed duration. You will receive regular income payments as with any other annuity, but only for the term specified which is generally five or ten years.
  • Enhanced Annuities: An enhanced annuity is specifically for those with medical conditions or lifestyles that mean they have a lower life expectancy, such as being overweight or being a heavy smoker.
  • Value Protected Annuities: This type of annuity ensures that after your death, your beneficiaries will receive a lump sum for the difference between the income you received and the amount you paid out.

It is vital to choose the right annuity type and income options for your pension savings and circumstances. Sometimes it is useful to seek financial advice on what decision you should make and which annuity type will be best suited to you and your situation.

Step 2: Check with your pension provider

Most pension providers will get in touch around six weeks before your retirement date and will let you know the details of your pension pot and a quotation for choosing an annuity with them. Always check if your provider includes a Guaranteed Annuity Rate (GAR) as these often have much better rates than annuities that are generally available.

Sometimes GARs come with restrictions but result in a significant boost in your retirement income. You should use this quotation from your pension provider as a starting point for looking into whether you can get a better rate somewhere else.

Step 3: Do your research online

You can find a lot of different annuity comparison tools online to help you to compare and research how much retirement income you could get from the open market. In most cases, this is a simple process where you just need to enter details such as your postcode, birth date, the type of annuity you want and some basic questions about your lifestyle and current health.

You can then look through all the various income choices available to you and consider other factors such as whether you want your income to be fixed or rise with inflation, and whether you need income to be paid to a spouse or partner after your death.

Using these online comparison tools will give you a reliable indication of the basic lifetime annuity rates that providers are currently offering and can give you a good idea of the kind of rate you can expect to receive. This can also be a great tool to compare the different types of annuity and help you to decide which is going to be right for you. Search multiple times using different types so you can understand the difference in rates between them all.

Step 4: Ask an expert

Choosing an annuity is one of the biggest financial decisions you will make and will determine your income for the rest of your life, so it is absolutely vital that you make the right choice. It is often advised to discuss your research and thoughts with a professional financial advisor before choosing which annuity is for you.

A financial advisor is a qualified professional that will be able to recommend which retirement income options and products are best suited to you, as they will consider your personal and financial circumstances. Often, speaking with a financial advisor can open up new options that you may have never even thought about, or just assumed wouldn’t work for you.

Financial advisors are regulated by the Financial Conduct Authority (FCA) and are required to follow their regulations. If the advice they give you is unsuitable, you will be protected provided that your financial advisor is registered and regulated by the FCA.

Some annuity providers will not give you a quotation without taking professional financial advice beforehand. There are even some providers out there who offer higher rates exclusively through financial advisors, so sometimes seeking financial advice can pay off in a big way.

There is also the option to use the services of an annuity broker. They will be able to give you information about the various annuity options that are available to you but will not be able to provide advice on which to take. If you use an annuity broker, you will be responsible for deciding which option is best for you based on the information they give you. This will give you less protection than buying an annuity through a financial advisor.

Step 5: Confirm and buy your annuity

Once you have chosen an annuity provider and the type of annuity you want, your potential provider will send you a personalised illustration of your retirement income. This will include a quotation, your options and any other product that you should consider, such as an enhanced annuity. After finalising your decision and you know exactly which provider you are going to buy your annuity from, your pension provider will release your funds to the new provider. In most cases, your annuity will be set up within 30 days.

If your pension provider offers a GAR make sure you find out what it is. In some cases, it can be as high as 10%, which is likely to be more than any rate you could find on the open market. If this is the case, shopping around isn’t necessary as you will be better off sticking with your current pension provider.

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