Helen Morrissey, head of retirement analysis, Hargreaves Lansdown: “Annuities can give you real peace of mind, securing a guaranteed level of income that ensures you meet your day-to-day needs in retirement. However, you need to choose carefully. Once bought an annuity can’t be unwound, so if you don’t shop around, you risk missing out on thousands of pounds over the course of your retirement. It’s very much a case of acting in haste and repenting at leisure.
Different providers offer different quotes. A recent search on HL’s annuity search engine showed the difference between the top and bottom quote for a 65-year-old with a £100,000 pension, looking for a single life, level annuity with a five-year guarantee, was £647 per year. Stretch this out over a twenty-year retirement and you are missing out on almost £13,000 in income, so it’s well worth taking the time to check.
Using an online annuity search engine enables you to quickly check the market to see what is available to you and make sure you are making the right long-term decision. As well as looking across the different providers to see what they can offer, it’s also important to take the following issues into account when considering an annuity.
Joint life or single?
The incomes from a single life annuity are higher than those from a joint life product, so it’s tempting to tick that box. However, if you are married or in a civil partnership this approach risks leaving your partner struggling if you die before them, as the income could stop. Joint life annuities will continue to pay out an income to your partner, so it’s worth considering whether this is the right option.
Level or escalating?
Again, level annuities have a higher starting income than escalating ones. The most recent data from HL’s annuity search engine shows a 65-year-old buying a single life level annuity with a five-year guarantee, with a £100,000 pension, can get up to £7,832 per year. However, an annuity that grows 3% per year has a starting income of £5,945. It may seem like a straightforward decision but you could be retired for a long time and inflation will nibble away at your purchasing power. The income from a level annuity may look suitable at the beginning of your retirement but over time you may start to struggle. An escalating annuity will grow every year. However, you need to weigh this up with how long it could take for the income from the escalating product to catch up with what you get from a level annuity. After that, how long will it take before you’ve got more overall income from the escalating annuity than you would have got from the level one? It could be well over a decade so needs careful thought.
Any health conditions?
It may feel counterintuitive to put all your health conditions down on your application form as you may feel like you will be penalised. However, giving a full account of your health could qualify you for an enhanced annuity that could give you a real income uplift.
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