Choosing what type of Annuity you buy, how it is set up and which provider to use can be a difficult process, made all the harder because Annuities can never be changed. We look at the 5 Golden Rules of buying an Annuity.
A recent conversation with a lady who called our office and insisted on buying her Annuity from her existing pension company, who by the way were the 6th most competitive, lead us to thinking of the ‘Golden Rules’ for buying an Annuity.
So how do make sure you get the right result and don’t end up regretting your decision?
1. First things first, is an Annuity right for you?
There are at least 10 ways to create an income from you pension, the first stage therefore is to make sure that an Annuity is the right option for you.
Once you have done that you can move onto the other ‘Golden Rules’.
2. Use your Open Market Option and shop around
It is often the case that your current pension provider will not offer you the most competitive Annuity rate. The Open Market Option, or OMO, allows you to shop about and buy your Annuity from a different company to your current pension provider.
The improvement in the Annuity rate can often be worth the effort of shopping around, figures recently released by the ABI (Association of British Insurers) show that of the people who did shop around nearly 50% bought their Annuity from a different company to their current pension provider.
Test this out for yourself by using our pension Annuity calculator, it’s a free online tool, which allows you to test the Annuity market and is a great place to start to do some initial research.
We shop around for almost everything else we buy these days, an Annuity is probably the second largest purchase, behind buying a house that we will ever make, don’t take the first quote your current pension provider offers you, shop around and see if you can get a better deal.
3. Check whether you qualify for an Enhanced Annuity
An Enhanced Annuity can give you a higher income by taking into account any health or lifestyle issues you may suffer from.
No matter how healthy you think you are check whether you or your spouse qualify for enhanced terms, you might be surprised that a medical condition you give no thought to on a daily basis is actually enough to get you a higher Annuity rate.
The ABI figures recently released showed that only 1% of Annuities bought from existing pension providers were enhanced, the message is therefore clear, not only should you shop around but you should also check whether you qualify for an Enhanced Annuity.
Checking is easy, an IFA can tell you very quickly whether or not you will qualify for an Enhanced Annuity.
4. Move to Cash
Stock markets are hugely volatile at the moment; it is not unusual to see falls of 2 – 3% during a single day on the back of events far away that you and I have no control over.
Another fall in the stock market just before you buy your Annuity would not be welcome, it therefore makes sense to be invested in safer assets in the months and weeks leading up to when you buy your Annuity.
I am constantly amazed by the number of people who are still invested in the stock market right up to the day that they buy their Annuity; this is highly risky and could result in a lower income for the rest of your life if markets move against you.
All pension providers will offer a Cash fund and making the switch is generally easy to do.
5. Take independent advice
Now I would say that wouldn’t I?
Seriously though, my fifth ‘Golden Rule’ can help you with the first four. An Independent Financial Adviser can help you understand the other retirement options, shop around for the best Annuity rate, check whether you qualify for an Enhanced Annuity and also help you move into Cash or safer assets should you choose to do so.
But advice costs money doesn’t it?
True, it does, however going directly to an Annuity provider or buying an Annuity from your current pension company will cost you the same. Many people don’t realise that if you go direct the Annuity provider still takes commission, but instead of paying this to an IFA, they pocket it as a windfall.
Taking advice costs no more than arranging it yourself directly with an Annuity provider.
Following these simple ‘Golden Rules’ will help to ensure you get a better Annuity, now and for the rest of your life.
The team of independent advisers here at Investment Sense are here to help, advise and guide you through this tricky decision, please do not hesitate to get in touch on 0115 933 84330115 933 8433 or email us at firstname.lastname@example.org