6 Common Annuity mistakes


Whether you are thinking about buying an Annuity now or indeed do not need to make a decision about which Annuity to purchase for a little while to come, we thought it would be useful to highlight the six mistakes most commonly made when it comes to this all important decision.

1. Not using the Open Market Option

This is probably the most common mistake, made by nearly two thirds of people (Source: Pension Income Choices Association).

The facts are simple, you may well get a significantly better income from your Annuity if you shop about. If you don’t check you will never know, and checking can take as little as five minutes using an online Annuity Calculator.

Remember, once you have bought an Annuity you can’t change your mind. After your house an Annuity is likely to be the most expensive thing you will ever buy, doesn’t it make sense to shop about?

2. Not checking whether you qualify for an Enhanced Annuity

This is very similar to mistake 1. Always check whether you qualify for an Enhanced Annuity, even if you don’t think you do, check, you never know.

A combination of a number of relatively minor ailments can mean you qualify for an Enhanced Annuity.

A short conversation with a suitability qualified IFA will help confirm whether or not you might qualify for an Enhanced Annuity.

3. Not looking at other options

A Lifetime Annuity is certainly the most popular way of turning your pension into an income, however there are alternatives.

When you are buying a house do you buy the first one you see or do you look around, weigh up all the options? Most people are not lucky enough to find their dream house straight away and spend some time considering all the options, often only to go back to the first one they saw. But looking around was time well spent to confirm that the right decision was being made.

An Annuity is no different, spend time looking at the other options, would Income Drawdown be better for you? Could the flexibility of a Fixed Term Annuity be useful in the future? Look at all the options available, you may well go back and buy a Lifetime Annuity, however at least you have checked.

You can always sell a house again, you don’t have that option with an Annuity.

4. Not reviewing your investment strategy close to retirement

Most people who come to us for retirement advice still have some, or all of their pension invested in equities (stocks and shares). This can be a very dangerous game, imagine another Greece, Portugal or Japanese crisis just before you come to buy your Annuity.

The world is a fast moving place and events many thousands of miles away can affect share prices here in the UK, and consequently the value of your pension.

In the last few years before you are due to buy your Annuity, we suggest you consider how your pension fund is invested, and whether you should opt for safer investments, which will be affected less by world events.

5. Going direct to a provider and not taking advice

We have had a number of clients tell us recently that they will get a better deal if they do not take advice and go straight to the Annuity provider as no commission will be charged.

As nice as this would be, it just isn’t the case.

If you go direct to the provider to buy your Annuity the commission will still be charged, it will just be retained by the Annuity provider, you will therefore be no better off and will not have benefited from an IFA searching the market for you.

6. Not considering a Purchased Life Annuity

Many people tell us they do not want their tax free lump sum as they wish to maximise the guaranteed income they will get from their Annuity. Very few however have considered combining a Purchased Life Annuity (PLA) with a Lifetime Annuity.

A PLA is taxed differently to a Lifetime Annuity and can result in a higher net income.

If you were planning on using 100% of your fund to buy a Lifetime Annuity, consider using the 25% which you can take as a tax free lump sum to buy a PLA instead of a Lifetime Annuity; you may just be better off.

This list of mistakes is simply the most common ones we see, there are plenty of others which we will highlight in weeks to come.

If in doubt seek advice, a good IFA is invaluable when searching for the best retirement solution and Annuity income.