Savvy Money: Switching is all the rage – it applies to annuities as well

Seeking the best deal is more complicated than staying with an existing provider, but can pay off

Do you hunt around for the best deal? Silly question! Of course you do. These days few of us buy what we need – or want – from the first shop or supplier we stumble upon. And it's almost government policy when it comes to energy companies, with David Cameron encouraging us to "go online" to get a better deal when British Gas announced a price rise this week.

And yet, when it comes to one of the most-important financial purchases that thousands reaching retirement have to make, far too few shop around, despite changes designed to encourage it.

I'm talking about buying an annuity – the little-understood and often-criticised insurance product that pays you an income once you've retired. Last year, more than 400,000 people bought an annuity, but I bet many of them didn't end up with the right one.

Making the right choice

Annuity rates have risen in the last three months, according to provider MGM Advantage, and now stand at a two-year high.

Despite this, compared to a few years ago they're pretty poor value. Perhaps it's not surprising that, when the average fund of £30,000 might only produce an income of around £5 a day, annuities could probably be best described as a grudge purchase.

But if you aren't in the fortunate position of having joined a salary-related pension scheme through your work, it's what you'll probably end up buying to convert your pension fund to a regular income. There are other options, such as income drawdown, but it's not suitable for everyone.

There's a growing chorus of pension experts who are calling for wholesale reform of the system for converting your retirement savings into an income.

However, any change on this scale would take years. So the challenge is to get more people buying the right annuity now.

Figures from the Association of British Insurers (ABI) show that less than half of those who buy an annuity shop around and buy it from a different provider. Research by annuity provider Partnership is more telling – 75 per cent of those it questioned don't think they'll gain by shopping around.

If they don't think there's anything to gain, it's not surprising more don't bother. And it's still too difficult for most people to take the first step, says Tom McPhail head of pensions research at investment firm Hargreaves Lansdown and Chairman of the Pensions Income Choice Association.

"People don't have experience of buying an annuity before they retire so they don't have confidence in what they're doing."

An ABI code – which was finally introduced after years of pressure by consumer groups – has made it harder for people to sleepwalk into buying an annuity from their existing pension provider.

But they need more help in making the right decision. I get emails from people who are worried that if they switch to an annuity provider that they don't know, it may go bust; a definite incentive to stick with the devil you know.

If you have a medical or lifestyle condition (such as being overweight or smoking), you stand to gain the most as your income could increase significantly if you qualify for an "enhanced" annuity.

However, figures from the ABI reveal that enhanced annuities account for just 6 per cent of sales by pension companies to existing customers (those who buy an annuity from their pension provider).

Where someone gets advice from an annuity specialist or independent financial adviser, the figure is more than 40 per cent.

Depending on the medical condition you have, you could get between 10 and 35 per cent more income every year (even more if you are very seriously ill).

If you are in good health, you could still benefit by shopping around. The ABI's latest example rates table show a £350 a year difference between its best and worst annuity providers for someone buying an income with a pension fund of £27,000 (that's the difference between £1,706 or 1,350 a year in income).


Seeking out the best deal is more complicated than going with your existing provider.

It will also cost money, either in the form of a standalone fee (typically a minimum of £500) or commission (1-3 per cent).

The long-term answer is major change to the annuity-buying process. But, if you're due to retire, don't stick with your existing provider without finding out just what else is on offer.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Arts and Entertainment
Gregg Wallace in Summer's Supermarket Secrets
tv All of this year's 15 contestants have now been named
Arts and Entertainment
Inside the gallery at Frederick Bremer School in Walthamstow
tvSimon Usborne goes behind the scenes to watch the latest series
Life and Style
A picture taken on January 12, 2011 shows sex shops at the Paris district of Pigalle.
newsThe industry's trade body issued the moratorium on Friday
Winchester College Football (universally known as Winkies) is designed to make athletic skill all but irrelevant
Life...arcane public school games explained
Arts and Entertainment
Could we see Iain back in the Bake Off tent next week?
tv Contestant teased Newsnight viewers on potential reappearance
Life and Style
Silvia says of her famous creation: 'I never stopped wearing it. Because I like to wear things when they are off the radar'
fashionThe fashion house celebrated fifteen years of the punchy pouch with a weighty tome
i100(and it's got nothing to do with the Great British Bake Off)
Angelina Jolie with her father Jon Voight
peopleAsked whether he was upset not to be invited, he responded by saying he was busy with the Emmy Awards
Bill Kerr has died aged 92
peopleBill Kerr appeared in Hancock’s Half Hour and later worked alongside Spike Milligan and Peter Sellers
news It's not just the world that's a mess at the moment...
footballPremiership preview: All the talking points ahead of this weekend's matches
Keira Knightley poses topless for a special September The Photographer's issue of Interview Magazine, out now
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
Arts and Entertainment
Cara Delevingne made her acting debut in Anna Karenina in 2012
film Cara Delevingne 'in talks' to star in Zoolander sequel
Mario Balotelli pictured in his Liverpool shirt for the first time
Life and Style
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Data Scientist (SQL,Data mining, data modelling, PHD, AI)

    £50000 - £80000 per annum + benefits+bonus+package: Harrington Starr: Data Sci...

    SAS Business Analyst - Credit Risk - Retail Banking

    £450 - £500 per day: Orgtel: SAS Business Analyst, London, Banking, Credit Ris...

    Project Manager - Pensions

    £32000 - £38000 Per Annum Bonus, Life Insurance + Other Benefits: Clearwater P...

    KYC Analyst, Birmingham - £200-£250 p/d

    £200 - £250 per day + competitive: Orgtel: KYC Analyst, Key Banking Client, Bi...

    Day In a Page

    Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

    The phoney war is over

    Russian troops and armour pour into Ukraine
    Potatoes could be off the menu as crop pests threaten UK

    Potatoes could be off the menu as crop pests threaten UK

    The world’s entire food system is under attack - and Britain is most at risk, according to a new study
    Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

    Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

    Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
    From Mozart to Orson Welles: Creative geniuses who peaked too soon

    Creative geniuses who peaked too soon

    After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
    Caught in the crossfire of a cyber Cold War

    Caught in the crossfire of a cyber Cold War

    Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
    Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

    Salomé: A head for seduction

    Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
    From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

    British Library celebrates all things Gothic

    Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
    The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

    Is the Hard Rock Café worth fighting for?

    The restaurant chain's owners are currently embroiled in a bitter legal dispute
    Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

    In search of Caribbean soul food

    Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
    11 best face powders

    11 best face powders

    Sweep away shiny skin with our pick of the best pressed and loose powder bases
    England vs Norway: Roy Hodgson's hands tied by exploding top flight

    Roy Hodgson's hands tied by exploding top flight

    Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
    Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

    Di Maria and Ronaldo: A tale of two Manchester United No 7s

    They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
    Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

    Robert Fisk: No victory for Israel despite weeks of devastation

    Palestinians have won: they are still in Gaza, and Hamas is still there
    Mary Beard writes character reference for Twitter troll who called her a 'slut'

    Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

    The Cambridge University classicist even wrote the student a character reference
    America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

    America’s new apartheid

    Prosperous white districts are choosing to break away from black cities and go it alone