Buying an annuity

Options for cashing in your pensions

Buying an annuity

By Paul Davies

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Buying an annuity

Which? explains some of the main issues you should consider when arranging an annuity. Our step-by-step guide will help you to get the best deal on your pension fund.

Buying an annuity is a way of turning all your pension savings that you've built up over the years into an income to last you the rest of your life. Fewer people have arranged annuities since the pension changes came into force.

Since April 2015, you've been able to withdraw as much of the money as you want when you reach 55, although it will be taxed as income.

Arranging an annuity is a complicated process, so it's important to know what you need to do at each stage. And it's vital that you shop around to get the best annuity rate, as you could miss out on a boost to your income if you fail to do so.

This guide explains the importance of shopping around and provides a step-by-step guide to buying an annuity.

Shopping around for an annuity

Why it's so important

After deciding what level of income you need, you should shop around and compare rates. This is called using the 'open market option' (Omo). 

This means you don't have to take the pension offered to you by your provider but can take your fund to another provider to get a higher rate. 

Shopping around can increase your retirement income by up to 30%. Each year, people throw way an estimated total of £1bn in pension income by not shopping around, so it’s important to read the advice on shopping around included in your wake-up pack.

You’ll also get access to a wider range of products, so you’re more likely to find one that suits you. For example, if you suffer from ill health, you could be eligible for an enhanced or impaired annuity. 

Go further: Annuity options – find out more about the different types of annuity and the right one for you

Step-by-step guide to buying an annuity

Step 1

Up to six months before you retire, your pension provider will send you a ‘wake-up pack’. This will tell you the value of your pension pot, the different annuity types available and the benefits of shopping around, rather than taking the annuity offered by their provider. 

Your provider will have to state which annuity types it does and doesn’t offer.

Step 2

Ten weeks before you retire, your pension provider will send you a follow-up pack. Neither this pack nor the wake-up pack will contain application forms for taking out an annuity. Follow-up packs stress the importance of making a decision.

Step 3

Once you’ve been made aware of your options, you can choose to take financial advice on what decision you should make. Your adviser should ask you:

  • whether you’re married or have a partner
  • whether you have any medical/lifestyle conditions
  • whether you’re concerned about your annuity losing value because of inflation
  • whether you’re taking any small pots as cash and whether you have any other pension pots

Step 4

If you don’t visit a financial adviser, your pension provider must make sure you’ve answered these questions.

Step 5

If you decide not to visit a financial adviser, you can shop around for your annuity yourself – doing this almost always gives you a higher income in retirement. Only non-advised providers will give you a quote without you taking advice first.

Step 6

Your potential provider will give you a personalised illustration of your annuity, including a quote, your options and why you should consider certain product types – such as an enhanced annuity.

Step 7

If you’ve used the Omo, then, once you’ve decided which annuity you’d like and which provider you’re going to purchase it from, your pension provider will release your funds to your new provider. Your annuity should be set up within 30 days.

Advised vs non-advised

Buying an annuity is a big decision, so seeking help from an independent financial adviser is a good idea.

Advisers research the annuity market for you and make a recommendation based on your goals. They will contact your current pension provider for your policy information and ensure that your funds are transferred quickly.

However, you can also go down the non-advised route, which is cheaper than taking advice. The key word here is ‘information’. A non-advised broker will tell you about the different types of annuity and show you how to compare your options. But none of this information will be tailored to you – it will be general.

As part of the major changes in the pensions market in April 2015, consumers now have the ‘right to guidance’ at retirement, via the Government's Pension Wise service, to help them make the complex decision about what to do with their pension savings. This free guidance is impartial, covers the individual’s range of options, and is provided face to face or over the phone.

Guaranteed annuity rates

Shopping around may not be the best option for a few people. If your annuity operates a guaranteed annuity rate (GAR), find out what it is – these can be as high as 10%, which is higher than any rate you could find on the open market. 

In these instances, you should stick with your pension provider.

  • Last updated: March 2016
  • Updated by: Paul Davies