Shopping around for lifetime annuities

The Open Market Option
Annuity rates vary from one life company to another, so you should make sure you shop around to get the best deal for you. There are a few things to think about first.

• If you're getting a pension from a personal pension arrangement, your pension provider should send you information between four and six months before you are due to retire, setting out what they will offer you based on the value of your fund. They will also tell you that you can shop around for a higher annuity. About six weeks before you retire your pension provider should give you an estimate of the value of your fund. You can use this to compare products from other providers. This is known as your open market option.



• Don’t assume the same company with which you built up your fund will automatically offer you the best rate. You may do better to shop around and check whether another company could offer you more. The annuity rate you get can affect your income by hundreds of pounds a year for the rest of your life.



• If you're getting a pension from an occupational defined contribution pension scheme, the trustees may buy your annuity for you, but you can also shop around on the open market and find the insurance company with the best annuity rate for you, or your scheme trustees can do this for you if you ask.

It can be difficult or impossible to change your lifetime annuity provider after you've bought your lifetime annuity, so take some time to choose the one that’s right for you.

 

Check what your existing provider offers

Before shopping around, make sure you understand what your existing provider is offering you. Check:

• whether your provider offers a guaranteed annuity rate. This is not the same as a guarantee period. A guaranteed annuity rate means that the provider has to offer a minimum annuity rate for your pension fund. Now that annuity rates are a lot lower than in the past, a guaranteed annuity rate can be very valuable and could give a higher retirement income than can currently be bought on the open market;

• whether your provider will charge your fund if you buy your annuity from another company.

Your existing provider will usually give you a quote for a specific type of annuity. Make sure you get a quote for the type of annuity you want, not just the one the provider offers you.

How long have you got?

Annuity quotes are usually valid for between 7 and 28 days.

If you change your mind – you may have the right to withdraw or cancel. If so, the provider will tell you and also tell you how quickly you must act.

Shopping around for your annuity

1. Get an estimate of the value of your pension fund, taking account of any charges, from your provider.

2. Decide whether you want to take a tax-free lump sum, and if so, how much (usually up to a quarter of your fund). If you decide to take a tax-free lump sum, deduct it from the pension fund value your pension provider gives you.

3. Decide whether you want:

o a single or joint-life annuity. If joint life, whether the pension paid to your partner is paid in full or reduced (say by a third) – or

o a level or escalating annuity

4. Think about whether you want your annuity to continue to be paid for a specific number of years (5 or 10), should you die shortly after you buy it.

5. Does your fund need to be a certain size to qualify for the better rates offered by another company? Some firms may not be interested in providing an annuity for small sums.

6. Are you a smoker? If you are, you may get a better rate from some annuity providers.

7. Do you have a medical condition that could reduce your life expectancy? If you do, you may get a better rate from some annuity providers. Some providers of impaired life annuities will also accept pension funds of less than £5,000.

You should now have the facts you need to get quotes from a range of providers.


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