Do the groundwork before you plunge into annuities

The right deal will get your retirement off to a flying start, writes Sam Dunn
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The Independent Online

Few people would turn their noses up at a pay rise of 17 per cent. But those about to buy an annuity could be doing just that by failing to check what's on offer from the full range of pension providers.

At the age of 50, you can choose to cash in up to a quarter of your pension pot as a tax-free lump sum. The remainder must be used to buy an annuity - a guaranteed income for life - by the time you reach 75. This is when it pays to do your homework. People who take the easy option and simply hand over the money to their own pension company are missing out on total income of around £50m a year, according to research from Bank of Scotland Annuity Service.

By tracking down a competitive annuity rate, individuals can boost their annual income by £240 for each £25,000 saved. But figures from the Association of British Insurers (ABI) show that pensioners are not doing this. Between April and June, less than a third of those buying an annuity took the time to find the best deals on the market - although the ABI stresses that at least half made some effort to beat the price offered by their pension company.

If you are about to purchase an annuity, a good place to start is the website of the Financial Services Authority (FSA), the City watchdog. This has a calculator identifying the best-value products available to you. (Remember that the quoted monthly income is gross; it will be taxed according to your income status.)

Take the example of a non-smoker without dependants retiring at 65; his £100,000 pension pot could buy £529 a month with GE Life. But if he'd gone to B&CE Insurance, he would have received £683 - an increase of £154, representing an annuity rate of nearly 7 per cent. In many cases, pensioners can boost their income by as much as 17 per cent.

Poor returns on annuities in recent years have led many people to hold off buying one for as long as possible. Rather than alleviating this problem, last week's rise in the Bank of England base rate could lead to more uncertainty.

Although higher interest rates generally mean better annuity rates, this is more likely to happen in the long term. "An interest rise doesn't guarantee [an immediate] rise in annuity rates. It's not like a mortgage where there's a direct link," explains Sean McCabe, annuities manager at independent financial adviser (IFA) Chartwell Investment.

And higher interest rates usually come with higher inflation, which eats away at the real value of an annuity.

Nigel Speirs, chief executive of IFA Buckles Investment Services, thinks it's still not a good time to buy an annuity if you don't have to. "It really depends on your circumstances, and whether you can afford not to take an annuity out," he says. "As you get older, you get a better rate. If you're, say, 55 to 60, then you could look at drawing down some income [from your pension pot], but there are risks with that as your remaining pot may get smaller rather than grow."

Only those with a £100,000 pension pot, says Mr Speirs, are likely to have enough money to be able to defer purchasing an annuity.

Choosing an annuity is a big decision. You can't change your mind once you've bought one. Yet what insurers offer is based on a confusing mix of factors - including the price of the underlying assets (usually government bonds, or gilts), the interest generated by these, and savers' own life expectancies.

If you prefer not to do your own research, you could purchase an annuity through an IFA. This will cost you a one-off fee, which you should check before you go ahead. Find out also whether your own pension fund offers a guaranteed annuity rate (GAR), which could be higher than rates available elsewhere.


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