Failing to shop around for the best annuity rate when you retire could see you missing out on much more income than previously thought, Which? Money has found.
Previous estimates had suggested that shopping around for the best annuity could net you an extra 20% in annual income, but the increase is actually far greater.
In fact, picking the best annuity rate, rather than the worst, could see you gaining an extra 31% in retirement income, if you’re in good health.
Choosing the best annuity
When you retire, you can convert your pension savings into an income by buying an annuity. However, there are lots of different annuity providers and rates can vary between providers.
In August, the Association of British Insurers (ABI) opened its ‘annuity window’, which shows examples of rates offered by 27 different annuity providers for a range of scenarios.
Annuity rates compared
The worst annuity in the ABI’s table, for a 65-year-old in good health buying a level annuity, pays 4.66%, while the best pays 6.11%. This means that getting the best rate could increase your income by 31.1%.
We found even bigger differences for customers in poor health. Someone who smoked for 10 years and was severely impaired by lung disease would see a 47% difference in income between the best and worst annuity quoted.
Who should buy an annuity?
Annuities are only suitable for members of defined contribution (DC) pension schemes. You’ll be prompted to buy an annuity from your pension provider between five years and six months before you retire.
If you belong to an employer’s defined benefit (final salary) pension scheme, your pension is usually paid directly from the scheme, so you don’t have to buy an annuity.