Are you thinking about purchasing an Annuity to fund your retirement lifestyle? It’s crucial to understand the product and shop around for the best deal as research suggests that many retirees could secure a better income.

An Annuity is a way of creating a guaranteed income throughout retirement if you have a Defined Contribution (DC) pension. Should you decide it’s the right option, the money accumulated in your pension is used to purchase an Annuity. Typically, the money paid out from an Annuity will be linked to inflation, maintaining your spending power throughout retirement, though this isn’t always the case.

In the past, an Annuity was the most common way to access pension savings. However, since the introduction of Pension Freedoms in 2015, taking a flexible level of income has grown in popularity. While more pensions now enter Flexi-Access Drawdown, there are still advantages to choosing an Annuity. For many, the security of a guaranteed income provides peace of mind.

Of course, there are drawbacks to weigh up too.

Among the downsides of purchasing an Annuity is the inflexibility. Alternatives to creating a retirement income may allow you to adjust your income, reflecting differing income needs as you go through retirement. However, an Annuity will provide you with a fixed income that won’t change. For some, this inflexibility will mean an Annuity isn’t the right option for them.

It’s important to remember that if you have a DC pension, you don’t have to select a single way to build a retirement income. If some level of flexibility is a priority, you could use a portion of your savings to buy an Annuity, accessing the remainder flexibly. This hybrid approach can provide you with a reliable, base income to offer peace of mind and allow you to adjust income when needed.

Finding the right Annuity for you

There are many different providers to choose from when purchasing an Annuity. It can make searching for the right product for you difficult. However, it’s an important task and one that’s worth investing some time in; after all, it will affect your income for the rest of your life.

According to research from Just Group, up to two-thirds of Britons going into retirement could receive a higher income, affording a more comfortable lifestyle.

One of the key factors influencing this figure is that providers aren’t consistently asking retirees about their health and lifestyle. Certain health issues could qualify retirees for an Enhanced Annuity, which would pay out more. For example, you could receive a greater income if you have high blood pressure or cholesterol. The full impact would depend on your personal circumstances and the provider chosen. However, figures from Hargreaves Lansdown can give you an idea of the difference disclosing health issues can make. A £100,000 pension is estimated to provide an annual income of:

  • £5,456 for someone with no health issues
  • £5,477 for someone with high blood pressure and cholesterol
  • £5,930 for someone who smoked 10 cigarettes a day
  • £6,276 for someone who is diabetic
  • £6,618 for someone that had previously had a stroke

Of course, even if you don’t have health issues, it’s important to shop around. The rates offered when purchasing an Annuity can vary significantly between providers.

Five steps to take if you’re considering an Annuity

1. Speak with a financial adviser: A financial adviser can help guide you throughout the process of purchasing an Annuity, from the initial point of seeing if it’s right for you. By seeing how your income needs will change throughout retirement and getting to grips with whether an Annuity is right for your circumstances, you can have greater confidence in your decision.

2. Understand the different Annuity products: There are many different types of Annuity products available, so it’s important to understand which one would suit you. For many retirees, a Lifetime Annuity is preferred, this would pay a defined income until you die. However, there are fixed Annuities too, which will be an income for a defined period of time.

3. Don’t make quick decisions: When you’re searching for an Annuity, it can be tempting to make a snap decision when you’re offered a rate that seems attractive. However, take a step back and give yourself some time to think. Once you’ve purchased an Annuity there is no going back, so it’s important to make sure you’ve secured the best deal possible.

4. Secure multiple quotes from providers: With two-thirds of retirees potentially receiving a lower income due to choosing the wrong deal, securing multiple quotes to compare should be considered a critical step. There are comparison tables available online that can help you with the initial research. Deciding on the type of Annuity product you want first can help you gather comparable results.

5. Explore other options: An Annuity used to be the most common way to create a retirement income. However, retirees today have far more choice and different products available. Be sure to look at the alternatives before you make a decision to proceed. You may find that a more flexible income is needed when you’ve considered your aspirations.

To talk about building a retirement income that suits your lifestyle goals and savings, please contact us.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.