We regularly write articles about Annuities, often looking at topics such as why Annuity rates have fallen, the options available to you, the importance of using the Open Market Option, and Annuity alternatives. However, we thought we would go back to basics with this article and look at the stages involved in buying an Annuity and what an Independent Financial Adviser (IFA) does when arranging an Annuity on your behalf.
So what should an IFA do when arranging your Annuity?
Stage 1: Understand your requirements
Successfully buying an Annuity isn’t simply about finding the best rate, although that is clearly important.
A good IFA will take time to understand your retirement needs and find out what’s important to you, the IFA who provides the best solution is the one who takes time to get to know their clients. You are an individual with specific needs; at such an important time in your financial life the last thing you need is a ‘one size fits all’ approach.
Stage 2: Consider moving to Cash
Most would-be retires that come to us are still fully invested in the stock market, this can be dangerous, exposing the fund to falls and potentially leaving you with less money to buy an Annuity.
An IFA should explain to you the pros and cons of moving your pension into the Cash or Deposit fund offered by your existing pension provider, to protect your savings from falls in the stock market. Whilst it is of course your choice whether you accept the advice, the option should be offered to you.
Stage 3: Explain your options
Whilst an Annuity might be the simplest way of providing a guaranteed income in retirement, it is far from the only option.
A good IFA will spend time explaining the advantages of disadvantages of other options, for example would a Fixed Term Annuity be a better option for you and save you locking into today’s Annuity rates? Do you want to take some investment risk and should you therefore perhaps consider a With Profit Annuity, an Investment Linked Annuity or indeed Income Drawdown?
There are around 10 ways of taking an income from your pension. Once you have bought an Annuity it can never be changed, there is no going back, so doesn’t it therefore make sense to consider all the options before you make your final decision?
The IFA should also explain the different options that are available with an Annuity. For example how much income would you like your spouse to have if you die before them, should a guarantee period be added, and the big one, should the income be level or indexed to help mitigate the effects of inflation?
Finally, the IFA will discuss with you your requirements for tax free cash, do you need it? How will you spend it? If you don’t want the tax free cash and want to maximise your income, would a Purchased Life Annuity (PLA) offer a more tax efficient option?
Stage 4: Research the market whilst investigating your existing pensions
Ok, let’s assume after weighing up all the options an Annuity is right for you, what next?
The IFA should consider whether you qualify for an Enhanced Annuity due to ill health or lifestyle issues such as smoking, if this is a possibility, they will complete a medical questionnaire which will be sent to the Enhanced Annuity providers for their consideration.
Whether you qualify for an Enhanced Annuity or not, your IFA will search the market for the best Annuity rate available for your circumstances, perhaps getting quotes base on different options, for example different levels of guarantee or spouse’s pension, so you can see the cost of including or excluding certain benefits and features.
The IFA should also contact your existing pension provider to make sure that by moving away and using the Open Market Option (OMO) you are not losing valuable Guaranteed Annuity Rates. The IFA should also check that your existing pension provider will impose no penalties if you move away and also the Annuity rate they are offering, it might actually be better, although in our experience this is rare.
Stage 5: Negotiate on your behalf to get the best Annuity rate
Depending on the size of your fund, some Annuity providers will negotiate and offer you a better rate, especially when they know they are not currently offering the best rate!
Not all Annuity providers will negotiate, but some will, especially on an Enhanced Annuity, your IFA should work hard on your behalf to push the Annuity providers as far as they will go, giving you the best possible income.
For larger cases, your IFA might also be prepared to give up some of their commission to improve the Annuity rate you get, remember though that the IFA has their own costs and also needs to make a fair profit!
Stage 6: Make recommendations
Once all the providers have offered their best quotes, a recommendation can be made. This may take the form of a range of options and a further discussion, alternatively it may be that only one option needs to be considered and it is simply a case of who offers the best Annuity rates.
Either way, before proceeding, you should make sure you are happy that the recommendation meets your needs, as an Annuity can never be changed. It therefore makes sense to take a little time to make sure you are happy with your decision.
Whilst you shouldn’t be rushed into making a decision, your IFA should let you know when the quote or quotes he or she has provided run out. All annuity providers only guarantee each quote for a limited period of time, and it is important that you understand that the figures you have been provided with might alter due to a rate change.
Stage 7: Complete the purchase
Once a recommendation has been finalised and agreed by you, it’s now a case of arranging for the paperwork to be completed, the pension fund transferred to your Annuity provider and the income started.
You can expect your IFA to handle all the paperwork and liaise with both the existing pension company as well as the new Annuity provider to make sure that this part of the process is completed as efficiently as possible.
You should expect your chosen IFA to go through each of these stages to ensure you get the best possible advice.
Our team of Independent Financial Advisers specialise in retirement advice and follow each of these stages carefully to make sure you get bespoke advice specific to your individual circumstances and needs.
Our team of Independent Financial Advisers in Nottingham are experienced in developing retirement income strategies for clients the length and breadth of the UK. If you are approaching retirement and would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email firstname.lastname@example.org