Why You Need to Ensure Your Annuity Rate is Personally Tailored

Written by Karen Bryan

£10 and £20 notes alternative 240Many people, upon reaching retirement age and being provided with an annuity quote from their pension provider will automatically accept the rate offered to them. It is a belief that the rate offered to you by your provider is the best annuity rate available to you; yet a study by the Financial Conduct Authority has found that 8 out of 10 people who stayed with their current pension provider actually missed out on income by not comparing their quote and not switching. To ensure you’re getting the annuity rate that you deserve and have contributed towards, here’s how to get your personally tailored quote for the best rate available.

Calculate your annuity

Visit an online annuity calculator and find out how much your pension fund could actually be worth to you. Be aware though that any online calculator you use will not be able to generate an accurate annuity rate, only a general idea of how much you could receive.

This is because gilt yields, that are one of the main factors in calculating rates can constantly fluctuate. To get a true figure it is always better to speak with an annuity provider, but an online calculator will give you a general idea of how much you could expect.

Chris Wilkinson, an IFA at the Finance Shop stresses the importance of comparing your rate: “Always take advantage of your open market option, search the whole of the market in order to get the best possible retirement income.”

Other factors will affect your annuity rate

While fluctuating gilt yields will have an impact on how your pension fund is converted into an annuity rate, other factors that can affect your quote will likely have not been taken into consideration by your pension provider. This includes enhanced and impaired annuity rates, offered to those deemed to have a lower than average life expectancy.

This could be through lifestyle choices (such as smoking), pre-existing medical conditions, or even just opting to buy an annuity later in life than the standard retirement age. Some have reported up to 40% increases on their annuity quotes through enhanced annuities, and this is one of the few times that having health problems could actually benefit you.

Paul Goddard, an IFA at Fundworks also advises: “Personally tailored annuity quotes will get you the best possible rates available by using all your personal details including your spouse’s health as well. A lot of people aren’t aware that annuity rates can vary depending on the health of your spouse”.

Choose the right annuity

What your priorities are for retirement and beyond will have a bearing on which annuity product you choose and in turn, your annuity rate. There are a number of types of annuity to suit different needs:

  • Level annuity – often referred to as a ‘conventional annuity’, this offers a fixed income for life. There is minimal risk, but no adjustment for inflation and nothing left over for loved ones when you pass away.
  • Increasing annuity – Offers a fixed income for life, but increases each year either by a pre-agreed amount or in-line with inflation. Payments will not continue after death.
  • Guaranteed annuity – Offers payments for a fixed number of years. If you pass away during this period, the payments will continue to be paid to a spouse, partner or nominated dependent.
  • Joint Life Annuity – This annuity is a joint-agreement between couples and will continue to pay out to a spouse as long as one of the couple is living. Be aware that income could fall significantly when the first partner dies.
  • Investment-linked annuity – An option for those who are more open to risk: your annuity is linked to certain stocks and can fall or rise in line with the investments. Only recommended for the financially savvy and those with alternative assets for generating a retirement income.

The importance of independent advice

If you’re still unsure of whether the annuity rate you are being offered is the best for you, it is advisable that you speak to an independent financial advisor. As Paul Goddard explains: “IFAs have access to all the companies that can give enhanced annuity rates depending on the health of both the individual and their partner”.

An IFA will be able to advise you on which annuity product is best for you based on what you are hoping to achieve both in retirement and after you have passed away.

As you cannot back out of the deal, purchasing an annuity is likely to be one of the biggest financial decisions you are ever likely to make. Ensuring you are getting the most from your pension fund, a fund that you will have likely spent the majority of your life contributing towards is essential, and an advisor can help you get the most out of your savings.