If you are approaching retirement and considering how to turn your pension pot into an income, one of the main routes open to you is an Annuity.
Whilst most people focus on getting the best Annuity rate, this is only part of the story; there is much more to this decision than meets the eye.
Let’s start with the basics, how can you buy an Annuity?
There are three ways:
- Direct from an insurer, which could be the same company as your current pension provider
- Through a non-advised broker, who as the name suggests cannot give you advice, just facts and figures
- Through an Independent Financial Adviser (IFA), who will give you advice on the best option for your individual circumstances
“Advice will cost me. I don’t need advice, I just want the best rate.”
That’s the understandable view of many people closing in on retirement, after all, we are told that for every other purchase we make going direct, or sorting the problem yourself, will cut out the middleman and get you a better deal.
However, this isn’t true when it comes to Annuities.
Let’s take the thorny issue of cost.
If you buy an Annuity direct from the insurer they will still charge you a commission, which they will simply pocket.
If you buy an Annuity from a non-advised broker, they too will charge a commission, of up to 6% in some cases according to a recent report from the Financial Service’s Consumer Panel.
Whilst commission can look as though it isn’t costing you anything, it is, each and every year through a lower income.
What will you get for this commission?
By using a non-advised broker you would expect to get a wider view of the market than going direct to an insurer. But you will be left with a long list of jobs, which you will need to do for yourself, to make sure you get the best possible outcome.
So what will you have to do?
1. You will need to decide whether an Annuity is right for you, other options such as Income Drawdown, might be more suitable
2. You will need to check with your existing pension provider, or providers if you have more than one, whether they offer potentially valuable Guaranteed Annuity Rates (GARs)
3. You will also need to confirm whether enhanced tax-free cash is available on your existing pension
4. Finally, in relation to your existing pension, you should check the Annuity rate offered by your existing pension provider; it would be unusual, but it might just be better than the open market
5. You will need to decide on the shape of your Annuity. Should you include a guarantee period, Do you need to add in a spouse’s pension? Is overlap important to you? Should you go level or indexed? Is value protection worth the cost?
These are terms which will probably be new to you, you’ll have to take time to understand what they mean, how they could benefit you and the cost involved with each.
6. Would deferral be a better option? Do you actually need the income now or are you just taking it because you have reached the retirement age on the scheme?
7. If you don’t want the tax-free cash would you be better using a Purchase Life Annuity / Lifetime Annuity combination, rather than using 100% of the fund to buy a normal Annuity?
8. Make sure you get quotes from every Annuity provider. Clearly if you go direct to an insurer you will only get their quote. But, if you go to a non-advised broker there is no guarantee they will get you a quote from every provider. Indeed the FSCP’s review was critical of some brokers who were purporting to offer quotes from the whole market, when in fact they did not
9. Weave your way through the complex world of Enhanced Annuities, which could give you a higher income if you suffer from medical problems or admit to certain lifestyle issues, for example smoking
10. Haggle between providers for the best possible rate. You would expect a double glazing or car salesman not to give you his best quote first time around, but unbelievably the same is true of Annuity providers. By playing one off against the other you can often improve the rate considerably
11. Decide whether to leave your pension fund invested as it currently is, often in potentially volatile stocks and shares, or move it to a safer, temporary home, whilst you make your decisions
12. Be very sure the decisions you take are right for you. If you go direct, or use a non-advised broker, and it turns out you’ve made the wrong decisions the buck stops with you, there is no regulatory protection
What’s the alternative?
Simple, seek Independent Financial Advice. A suitably qualified, knowledgeable and experienced IFA will do all of these things for you, as well as working hard to get you the best possible rate.
Even if you take the direct or DIY approach for your other investments, which we agree can save you money, we would urge you to take advice at retirement.
Yes, you will pay a fee, but it will often be less than the commission pocketed by insurers if you go direct or use a non-advised broker.
To put it bluntly, there is no way of buying an Annuity without having some cost to you, in the form of a commission or fee, why not get something for it and take advice?
If you need a second opinion consider the views of the experts. We asked noted pensions campaigner Ros Altmann for her thoughts: “Annuities are a unique financial product. Once bought, they can never be changed, so it is vital to get it right first time. Using an Independent Financial Adviser should give you full regulatory protection and can make sure you are buying the right type of annuity at top rates.”
Ros continued: “What is even more astonishing is that this service often costs less than trying to do-it-yourself through an annuity broker. Whenever you buy an annuity you will be paying someone for the purchase, why not ensure that money goes to someone who is on your side, rather than just taking the money for themselves?”
We’ll give the last word to Paul Lewis, presenter of Moneybox on Radio 4, who recently said: “The fee you pay an independent financial adviser will often be less than the hidden charge paid when using a ‘non-advised’ annuity website.”
We couldn’t agree more!