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
Saturday 26 October 2013
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
- 2 Harry Potter fans can apply to the Hogwarts-inspired College of Wizardry
- 3 Jessica Chambers: 19-year-old woman 'doused with lighter fluid and burned alive' in the US
- 4 Russell Brand calls Nigel Farage 'poundshop Enoch Powell' in BBC Question Time debate
- 5 Orange Wednesdays are no more
Disgruntled RBS worker writes hilarious open letter to Russell Brand after anti-capitalist publicity stunt leaves him hungry
Nigel Farage defends Kerry Smith 'ch***y' comment: 'If you are going for a Chinese, what do you say you’re going for?'
Nigel Farage's approval rating hits 'record low' as popularity suffers in wake of Ukip sex scandal
Pakistan school attack live: Taliban kill at least 132 children in 'horrifying' massacre
Rozanne Duncan: Ukip expels councillor for 'jaw-dropping' comments made in BBC TV interview
Sony hack: Angelina Jolie branded 'seriously out of her mind' in further embarrassing leaked email saga
iJobs Money & Business
£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...
£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...
£20000 - £25000 per annum + OTE £35000: SThree: SThree are a global FTSE 250 b...
£20000 - £25000 per annum + OTE £35K - £45K: SThree: SThree Group have been we...
Day In a Page
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens