Annuities Explained Buying an Annuity Explained

Buying an Annuity explained

It is important when buying an annuity that you get it right the first time, as once you have purchased an annuity, there is no going back.

Most of you will have what is called an open market option (OMO) clause in your pension. This means you do not have to automatically accept the annuity rate offered to you by your pension provider. If you so wish, you are entitled to take your pension fund to another provider in order to get a higher annuity rate.

The only time that you may not have access to the OMO clause is if you have a retirement annuity contract (RAC). Research carried out by the Financial Services Authority shows that taking the OMO option, just by comparing the other options, can increase your annuity rate by as much as 20 percent. With this in mind, it is massively important you shop around; this could make a difference of hundreds of pounds a month to your retirement income.

Seek Advice

It is advisable to seek professional advice before making any final plans regarding annuities. An Independent Financial Advisor can inform you of your best options and look at the entire market to see what is out there. Acquiring the help of a professional allows you to compare the whole market, using the professional’s experience and knowledge to make sure you receive the best annuity rate available to you.

No payment upfront

Whilst Independent Financial Advisors will charge a fee or commission, this usually comes from your pension fund, so often you don’t have to pay out any money up front. The additional income they find for you, through their expertise, will nearly always outweigh the commission they charge in the first place, making it well worth your while paying the fee.

Annuity Rates

Annuity rates can be affected by a certain number of things.  Firstly the provider you choose, who will not necessarily be the provider you took out your pension with in the first place. Secondly, as life expectancy increases, annuity rates tend to decrease. Your health can also affect the rate; often people who suffer from poorer health can receive a higher annuity rate, as they will have a shorter life expectancy. The older you are when you buy an annuity, the better the rate you’ll receive, as you’ll be seen to have a shorter life expectancy. Your sex also affects your annuity rate, women are offered lower annuity rates than men of the same age and with the same pension pot because, on average, they live longer. If you then choose to add on any extras such as index linking, guarantees and survivors pensions, the rate may decrease again.

85 % take conventional annuity

Around 85% of people choose to take a conventional level annuity, which is a plan set up to pay the same amount of income each month for the rest for your life. The only downfall is that there is no going back once you have taken out an annuity. The security of this kind of plan is what is attractive, as it offers you a secure fixed income after you retire. Yet, these are often not the most flexible options available.

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If you are a person that likes to take some risk, or can afford to do so, you could choose to opt for an investment linked annuity. These annuities are beneficial if the returns on the underlying investments are strong. However, if the investments falter, your income may decrease over time. All of these plans should only be considered after gaining independent financial advice.

There are numerous types of annuity that can generate income, you could use half your pension to buy an investment linked annuity and the rest to buy a conventional annuity.


Annuities can be extremely flexible, as you can tailor them to suit your needs. For example, if you are married or have a civil partner, you can take out a joint life annuity. You also may have the option of a guarantee, which can provide you with income regardless of if you live or die over a certain period of time.


Inflation linked annuities provide you protection against inflation, as they will increase your payments in line with inflation. These will start with an initial income 30 to 40 percent lower than a conventional annuity. Conventional annuities do provide you with a certain safeguard against inflation, with payments that rise a set percentage each year. This protects you unless inflation starts to increase substantially while the set percentage remains the same.


Thinking of Retiring Soon? Have a look at our Annuity Comparison Table


Other Options

If, after talking directly to a financial advisor, you still feel that taking out an annuity is not right for you then there are other options available. If you have a large pension pot you can buy into unsecured pensions (USP’s), otherwise known as income drawdown. These provide a regular income without losing ownership over your fund to third parties, such as insurance companies. This fund can be passed on to beneficiaries if you die, subject to a 35% tax charge.

The most important thing to remember when buying an annuity is to shop around. In order to get the best deals on the market you just need to put a little time, and potentially money, into researching the options that are best for you against what is initially offered to you by your pension provider!

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