With new on pension reforms disappointing at best, and state pensions unlikely to provide a large income in retirement, planning for retirement has become incredibly important of late.
One of the key decisions that will need to be made upon retirement is whether or not to buy an annuity and how to make sure that annuity provides the maximum amount of income with the best options for you.
First of all, shopping around for the best annuity rate is important. Using savings or investing your pension will be unlikely to provide income for the rest of your life, as both depend on the amount of your money either saved or in pension funds. An annuity is the only guaranteed way to do this.
Annuities have a huge variation in price, and while your pension scheme’s provider will send you a quote, you may find better options on the open market.
This shopping around is called the open market option (OMO) and it is your legal right to use it. It is nearly unheard of to change annuities later in life, so exercising your right to use the OMO now is extremely important in guaranteeing the best income you can possibly get.
Some annuity rates can be up to 17% better than the quotes of some pension providers, and so comparing annuity rates is very worthwhile. The annuity rate your pension provider offers may be a better rate for your individual circumstances than any on the open market, but it is important to find this out for yourself.
Have a look at our annuity comparison table below to find the best rates tailored to your needs.
A Quote For Your Circumstances
The next way to improve your income in retirement is to ensure that the quote you receive is tailored to you. You might be able to consider an enhanced or impaired life annuity, depending on your circumstances, which consider lifestyle or medical conditions, and allow more income due to a lower degree of life expectancy. Over one third of retirees might qualify for an enhanced annuity but most people don’t realise and don’t take it.
The best annuity rate may not be the one that hands out the most income—due to the difference between single life and joint life annuities. Single life annuities may provide the most income, but if you have a partner, dependent, or spouse, who depends on your income for some or all of survival, they are extremely risky. Your family will not receive anything if you haven’t made other provisions and you die before they do.
A joint life annuity is one that pays income until the death of the second partner, and can be set up to give less money after the first partner dies, in order to increase the amount of money received at the beginning. A guaranteed annuity, the other option, means that the annuity will be paid for a minimum period. However it is only guaranteed for the period of time taken out.
Older pension policies might offer a Guaranteed Annuity Rate (GAR), which would be better than current annuity rates. You can also contact an independent financial advisor by clicking here to fill in an annuity enquiry form.
Finally, the last choice is between a level or increasing annuity (escalating annuity). A level annuity will pay a larger amount of income, but does not account for inflation. An escalating annuity pays much less at the outset but will increase over time until it eventually gives you more than a level annuity, accounting for inflation, depending on how long you live.
Often the escalating annuity increases in line with inflation (usually the RPI), or by a set rate, for example 2% or 3% per year. It still will take years in order to surpass the total amount received by a level annuity.