How to shop around for an annuity

The rules for how you can access your pension pots were made more flexible from 27 March 2014, and will be made even more flexible from April 2015. This article will shortly be updated to reflect those changes and their effect on annuities. For more details read our guide New rules about pensions from 27 March 2014.

Most people with a defined-contribution pension use their pension pot to buy an annuity when they retire, to provide an income for the rest of their life. In most cases this is a one-off and irreversible decision, so choosing the right type of annuity and getting the best deal are crucial.

Getting the right annuity for you

You don’t have to buy your annuity from your pension provider. You can shop around. This is known as the open market option. You should shop around:

  • for a better deal and a wider range of retirement income options
  • to see if your health or lifestyle means that you are eligible for an enhanced annuity (these pay higher rates than a standard annuity, sometimes 40% more).

Watch this video to discover why it might be a good idea to shop around for an annuity and what to bear in mind when making your retirement plans.

Shop around for a better deal

Shop around

Each year, people buying annuities throw away £1 billion in pension income by failing to shop around. Whatever you do, shop around otherwise you could regret it for the rest of your life.

Source: ‘Treating DC scheme members fairly in retirement?’ NAPF and Pensions Institute Research, February 2012

You should always shop around for an annuity to get a better deal than your pension provider has offered you. This could increase your retirement income by 20% each year for the whole of your life.

Not only will different annuity providers offer different rates, they’ll also offer different annuity options. Shopping around means you’ll be more likely to find the right type of annuity that suits you.

See if you’re eligible for higher income because of health or lifestyle 

An estimated 40% of people qualify for an increased retirement income due to poor health and unhealthy lifestyle

If you suffer from ill health or have an unhealthy lifestyle – for example, if you’re a smoker – make sure you check whether you’re eligible for an enhanced or impaired annuity. These can deliver a significantly higher income in retirement, but many people who are eligible for them don’t take advantage.

Step 1 - Decide on the kind of annuity you want

Choosing an annuity is about more than getting the best value on the market. There are different types of annuity and you need to get the most appropriate one for your circumstances and priorities.

Do some homework – find out about the different types of annuity to help decide which one’s best for you, using the link below.

Step 2 – Check what your pension provider is offering

At least six weeks before your retirement date, your provider will contact you with details of the value of your pension pot and an indication of the retirement income your pot would generate if you bought an annuity with it.

Check whether your agreement with your existing provider includes a guaranteed annuity rate (GAR). These can be very valuable as they can offer much better than the rates available on the market – they may come with restrictions, but they can lead to a significant boost to your retirement income.

The retirement income offered by your current provider is your starting point – this is the figure you’re trying to beat by shopping around.

Step 3 – Use our comparison tables to see if you find a better rate

Try to beat the retirement income offered by your pension provider. Our tables are up-to-date and include rates from a wide range of companies.

To use the tables you'll need to input some basic details, such as the amount of your pension pot, your planned retirement age and your postcode. You'll also be asked about the kind of annuity you're looking for, for example, whether or not you need an income that will continue to be paid to a spouse or dependant after your death.

The tables also give you the option of answering questions about your health and lifestyle. Annuity providers may pay you a higher regular retirement income if your life expectancy could be shortened because of your lifestyle (for example if you smoke) or your medical history. These are called 'enhanced' or 'impaired' annuities. So don't hide health problems, it could cost you money!

On the basis of the information you provide, the tables will give you a good idea of the rates companies are offering. You can then request quotes from one or more companies offering the best deals (see Step 4 below).

Step 4 – Choose your annuity or get some help

If you’ve found a better annuity deal than your current provider is offering, whether by using our comparison tables or through other research, you can usually go direct to the company to ask for a quote.

However, in most cases, choosing an annuity is a decision that will determine your income for the rest of your life. So making the right choice is crucial and we recommend that you get help from a financial adviser or specialist annuity broker.

Even if you decide to seek help, it’s still useful to complete steps 1 to 3 above so that you understand the options and are better prepared to make the right decisions.

You can get two types of help:

  • financial advice – where the adviser assesses your needs and circumstances, explains the options and recommends the most suitable product for you
  • information and support – where you are provided with factual information about what’s available, some explanations about about the options, but no recommendation about what to choose. You make the decision.

Some companies specialise in helping people choose annuities, and they will ask you up-front whether you want ‘advice’ (ie to be given a recommendation) or just information (ie you make the decision yourself). Read our guide below to understand more about your rights when buying with or without advice.

Using a financial adviser to recommend an annuity

A financial adviser will assess your needs and circumstances, explain all the options and recommend the most suitable product for you. This advice can cost in the region of £750.

In addition, advisers can also complete much of the paperwork for you, though will usually charge for this service.

Using a specialist annuity broker for information and support

You can also use a specialist annuity company to find the best deals on the market rather than providing you with financial advice. The cost of this help is built into the rates you’ll be quoted, so it’s easy to make comparisons.

Annuity brokers will be able to help at a wider range of fund sizes – and will be able to help at fund sizes a below £50,000. If the fund size is below £10,000, shopping around is more difficult. However, if the total of all your pension funds is not more than £18,000, you can take it all as a cash lump sum rather than taking an income. This is known as trivial commutation. You must be aged 60 or over, and you must do it within a 12-month period. One quarter of the lump sum will be tax free and the rest is taxed as income.

As specialist brokers deal with all the top annuity providers and offer the full range of annuity types and features, including enhanced and impaired annuities, they can find you the best deal for your particular requirements.

As well as sending you quotes, they’ll handle any admin if you decide to make a purchase, including if you’re merging multiple pension pots to buy a single annuity.

However, the specialist won’t recommend which product is the best for you. They’ll disclose all the details to you, but the final responsibility for choosing is yours. Unlike if you use a professional adviser, you cannot complain if you end up with a product that’s unsuitable for you.

Follow the link below for more about finding and choosing the right specialist broker.