Guest Blog: ‘Approaching retirement? Be sure to avoid the biggest financial mistake of your life.’


Guest blogJulian Knight, Personal Finance Editor of the Independent on Sunday, writes exclusively for Investment Sense:

The majority of people should seek advice when purchasing an Annuity, says Julian Knight, personal finance editor of the Independent on Sunday. Not to do so could severely impact their retirement.

It’s one of the biggest financial decisions you can make but many people spend no more than a few minutes signing on the dotted line.

Julian Knight

Julian Knight

Personal Finance Editor of the Independent on Sunday

Converting your pension pot into an income to last you the rest of your life – called ‘annuitisation’ – can be the difference between a prosperous old age and one spent with an eye forever on your bank balance.

New industry figures show that the difference in the size of income that can be secured can be as much as 25 per cent between Annuity providers. That’s a massive number.

Exercise your OMO (Open Market Option)

At present, the majority of people getting to retirement simply accept the Annuity offered by their pension provider, failing to exercise their right – called the ‘open market option’ – to take their pension pot and seek out the best possible Annuity income.

Exercising the open market option and seeking the best Annuity rate can be done solo but the best deals are often sourced via an Independent Financial Adviser (IFA).

A qualified IFA has experience of dealing with hundreds, if not thousands of people, looking to convert their pension pot into an income.

They will therefore have an inside track when it comes to finding the best Annuity rate, and know immediately whether the offer being made by your pension provider cuts the mustard or comes up short — meaning you should look elsewhere for a better deal.

Enhanced Annuity?

An experienced IFA will also know the right questions to ask so that you don’t miss out on the very best Annuity rates.
For example, Annuity providers offer the option to those with medical conditions that may be life-shortening to receive a higher income than normal.

This income uplift can be as much as 25 per cent and the conditions that qualify are much more varied than you may think. It isn’t just the likes of cancer or heart disease and other obvious major illnesses that can lead to an income uplift but also more routine ailments such as diabetes.

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An ‘enhanced’ Annuity is also available to smokers because in general they, too, have a higher probability of dying younger than non-smokers.

However, an EU directive that came into force at the tail end of last year outlawed the basing of Annuity payouts on gender, and as a result both men and women in identical circumstances are now entitled to the same income in retirement.

Inflation proofing?

In addition, an IFA will also be able to recommend whether or not your Annuity should be designed to take account of inflation and whether or not you need to have an income paid out to a spouse or civil partner if you die before them.

‘Inflation proofing’ your Annuity is often a bright idea because, due to longer life expectancy, an Annuity may have to cover you for 30 years or more.

Over that sort of timescale inflation can decimate a savings pot and what may seem like a good income at retirement can prove inadequate in your twilight years.

Likewise, if you were to die soon after buying an Annuity and have failed to buy a product that makes the provision for an income to be paid out to a loved one, then they could find themselves struggling financially.

Annuity minefield

In summary, converting a pension pot into an Annuity is a terrific opportunity to set your finances straight for the rest of your life, but it is also a bit of minefield and you shouldn’t think of going it alone unless you are really confident that you know precisely what you are doing.

In most cases, the case for taking advice is crystal clear.

Julian Knight is an experienced financial journalist and is currently Personal Finance Editor of the Independent on Sunday. He also writes for the Evening Standard, has been Business Editor of the Independent on Sunday, and regularly discusses personal finance issues on radio and TV. In his spare time, he enjoys cycling, travelling, and good food and wine. He is also the Conservative Party candidate for Solihull: