How to boost your annuity income by up to 31%Which? research highlights importance of shopping around

19 November 2016

Annuities

In spite of falling rates, it's still important to shop around for the best annuity

Pensioners could increase their retirement income by tens of thousands of pounds if they shop around for their annuity, according to new Which? research. 

In October 2016, we explored the annuity rates on offer for two different scenarios and found that you could be offered up to 31% more a year depending on your provider.

The huge gap between the best and worst deals comes despite annuity rates being at historical lows.

Our full investigation appears in the December issue of Which? Money magazine. If you'd like to read our latest investigations and expert guidance on pensions, savings, investments, tax and more, try Which? Money for two months for £1.  

Best and worst annuity rates

Using the Money Advice Service annuity calculator, we explored the range of rates that are on offer for two different scenarios.

  • A couple aged 65 in good health, with a fund worth £100,000 wanting a joint-life annuity increasing at 3% per year, paying 50% to their nominated beneficiary when they die.
  • A couple aged 70 who were both smokers with high blood pressure, with a £100,000 pot wanting a joint-life fixed-rate annuity paying 50% to their nominated beneficiary.

The tables below reveal the best and worst quotes we were offered, with the percentage difference and what that would mean in terms of cash over an average lifetime.

Scenario 1 - couple aged 65 in good health
Best quote offeredJust Retirement - £2,882
Worst quote offeredSaga - £2,314
% difference25%
Difference over one year£568
Lifetime differencea£11,161
 
Scenario 2 - couple aged 70 in poor health
Best quote offeredAviva - £5,700
Worst quote offeredStandard Lifeb - £4,343
% difference31%
Difference over one year£1,357
Lifetime differencea£19,882

Table notes
aAssumes an average life expectancy of 83.4 for the man and 85.9 for the woman. bStandard Life is no longer selling annuities on the open market.

Find out more: annuities explained - see our video guide 

What to consider before buying an annuity 

If you retired before April 2015, it’s likely you’ll have been obliged to buy an annuity, but the since pension freedoms were introduced, retirees have more options when it comes to generating an income in retirement. 

Annuities remain a sensible option for some seeking to secure a guaranteed income in retirement, but there's a lot to consider before purchasing one. Use our checklist to help with your preparation. 

You can’t change your mind

Once arranged, an annuity cannot usually be switched or cancelled so it is vital to consider the options carefully, including how much income your spouse or partner would receive when you die.

Consider income tax 

Be aware that the income you will receive from your annuity will be subject to income tax and therefore it could push you into a higher tax rate band, meaning you could pay 40% or even 45% tax on some of it.

Inflation

Unless you opt for an escalating annuity (index-linked), you’ll get the same pension payments each year and over time you’ll be able to buy less with your income as prices go up.

It’s important to shop around

You have a legal right, under the open market option (OMO), to buy your pension annuity from any provider. By all means check what your provider is offering, but then take the time to phone other annuity companies. While the number of providers offering annuities on the open market has dwindled, there's still a lot to be gained by checking rates elsewhere.

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