Buying an Annuity is a big decision; in fact it’s probably the largest single purchase you will ever make after buying your house.
To add a little more danger or excitement, depending on your point of view, once you’ve bought a Lifetime Annuity it can never be changed. If you make a mistake, choose the wrong option, or don’t get the best Annuity rate, there’s nothing you can do about it.
We’ve often talked about the three ways you can buy an Annuity:
1. Direct, either from your existing pension provider or an insurance company
2. Via a non-advised Annuity broker
3. Through an Independent Financial Adviser (IFA) who will advise you on your options
Whatever route you choose (hint: we believe using an IFA is best!) you should be asked a series of questions to ensure you get the best possible outcome for your circumstances.
We’ve listed the questions and why they are important. If you are not asked them all we’d politely suggest it’s time to move on and consider an alternative adviser, broker or insurer.
Questions you should be asked before you buy an Annuity and why!
Let’s start with your requirements:
- Following the the proposed new rules announced in the Budget, is an Annuity still the right option for you?
The Chancellor’s latest Budget proposed new rules, allowing pensioners greater access to their pension pot. Before you buy an Annuity, you need to understand whether these proposals mean an alternative to an Annuity would make sense.
You can read about the proposed pension changes by clicking here.
- Do you actually need the income?
If you don’t need to take the income, because you already have sufficient to pay your bills, it might be beneficial to leave your pension ‘unvested’, in other words defer taking an income.
- Are you sure an Annuity is right for you?
Following the proposals in the Budget these options will be available to more people and need to be considered, before any decision to purchase an Annuity is made.
- What other income do you have? What rate of tax do you pay?
Some retirement income options, such as Flexible Drawdown, are only available if you have a certain level of income, although the Government proposes to change this from April 2015.
- Do you need the tax-free lump sum or is maximising the income you receive more important?
If your priority is income, you should consider buying a Purchase Life Annuity with your tax-free lump sum, rather than using all of your pension pot to buy a Lifetime Annuity.
- Do you want to inflation link your income or do you want it to remain level?
Inflation proofing your Annuity can be expensive, but can you afford for your income never to rise again?
- Do you have any financial dependents? Do you need the income to continue to your spouse should you die before they do?
By adding either a Guarantee Period or Spouse’s Pension you can make provision for your spouse, partner or civil partner if you die before they do. Buying a Single Life Annuity when you actually need to protect your spouse or partner, is one of the most serious mistakes you can possible make.
About your existing pension
- Does your existing pension have any of the following:
– Guaranteed Annuity Rates (GARs)
– Guaranteed returns
– A tax-free cash lump sum of greater than 25%
– Penalties for taking benefits
It’s important to check these things out to make sure you don’t give up valuable benefits. You wouldn’t want to find you actually had a double digit Guaranteed Annuity Rate, a couple of weeks after you’ve bought an Annuity from another insurance company.
- How is your existing pension fund invested? Have you considered moving to a Cash or Deposit fund to protect the value of the pension pot whilst you make your decisions?
Stock-markets can be volatile, and a drop in prices just before you buy your Annuity wouldn’t be welcome. You can protect yourself from this by moving to a Cash or Deposit fund in the months or weeks leading up to your retirement.
- What Annuity rate will your existing pension provider give you?
It’s unlikely, but possible, that your existing pension provider might offer you the best Annuity rate.
About you and your spouse, civil partner or partner
- Have you suffered from ill health? Do you take medication? Have you ever been hospitalised? When did you last see your GP?
If you suffer, or have suffered from, ill health, even if the condition is relatively minor, you could qualify for an Enhanced Annuity, which will increase your retirement income.
- What is your latest blood pressure and cholesterol readings?
Get checked just before you buy your Annuity, you never know what you might find!
- Do you smoke? If so, what do you smoke and how much?
If you smoke you will probably qualify for an Enhanced Annuity. The exact increase to your Annuity rate will depend on what you smoke and the quantity.
- Have you ever smoked? If so what did you smoke, when did you give up and how much did you smoke?
If you have given up smoking most Annuity providers won’t offer you an Enhanced Annuity, even if you smoked for 30 years and only gave up say three years ago. However, there is at least one Annuity provider who will offer you better rates if you are a reformed smoker.
- What is your BMI (Body Mass Index) or height / weight ratio?
It isn’t just people who are overweight who might qualify for an Enhanced Annuity; if you are underweight this could also help to increase your retirement income.
- How much do you drink? What type of alcohol do you drink?
Trying to estimate the number of units you drink is hard. Far better to tell your broker, adviser or insurance company the amount and type of alcohol you consume and let them work the number of units out for you.
Furthermore some Annuity providers give better rates depending on the type of alcohol you drink, for example a beer or sprit drinker may get a better rate than a wine drinker.
- Are you ‘tee total’?
If you never drink this can also influence the rate you get, at least one Annuity provider will consider giving ‘tee totallers’ an Enhanced Annuity.
- What age did your parents die? Did they suffer from any illnesses during their lifetime?
When you apply for Life Insurance you get asked this question, so why not when you buy an Annuity? Which is after all insurance against living too long!
To the best of our knowledge only one Annuity provider takes this information into account. But it’s important you are asked, they may be the best Annuity provider for you!
- What type of jobs did you do during your working life?
The more manual the work you did, the more likely you are to get an Enhanced Annuity.
- What was the highest level of educational achievement you attained?
Strangely, at least one Annuity provider will consider offering an enhanced rate for people who left the educational system earlier than others; that’s a polite way of saying “didn’t go to University!”
- What is your postcode?
Life expectancy is partly based on where you live.
Have you been asked all these questions?
The list isn’t definitive, but it’s a good start. If your annuity broker, insurance company or Independent Financial Adviser doesn’t ask all of these questions, and others, they may not have enough information to go to all Annuity providers and get you the best rate.
To put it another way, if you don’t get asked all these questions, it’s time to look elsewhere.
We’re here to help
Our Independent Financial Advisers ask all these questions and more.
Being independent we research the whole of the market to ensure we get you the best possible Annuity for your circumstances.
We are experienced in helping clients the length and breadth of the UK to turn their pension pot into an income and would be happy to advise you.