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Buying an annuity

It's vital to shop around before you buy an annuity. Read our step-by-step guide to buying an annuity to make sure you get the best annuity deal.

In this article
Should I buy an annuity? Why you MUST shop around for an annuity Step-by-step guide to buying an annuity
Buying an annuity with and without advice What are guaranteed annuity rates?

Should I buy an annuity?

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.


Why you MUST shop around for an annuity

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

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. 

Unfortunately, there are now fewer providers offering annuities on the open market.

Shopping around can increase your retirement income by up to 20%.

Each year, people throw away 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. 

Step-by-step guide to buying an annuity

Step 1 - the 'wake-up pack'

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, your pension options, 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 - the 'follow-up pack'

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 - decide whether you want to take financial advice

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

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

Step 4 - shop around

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. 

You can use tools such as the Money Helper's annuity comparison tool, or use annuity brokers to find the best deals currently available in the market, and tailored to your circumstance.

Only non-advised providers will give you a quote without you taking advice first. There may be annuity providers offering higher rates via only a financial adviser. 

Step 5 - get a personalised illustration

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 6 - get your income within 30 days

If you’ve used the open market option, 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.

Buying an annuity with and without advice

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, you 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.

What are guaranteed annuity rates?

Choosing an annuity via your current pension provider can be beneficial. If your pension policy has a guaranteed annuity rate (GAR) written into it, you should think carefully before giving it up. 

GARs were included in lots of personal pension contracts in the 1980s and 1990s. They guarantee the rate at which you can secure your retirement income, irrespective of the market rate when you retire. 

They typically provide preferential rates of 10% to 12% – more than double what you would get on the open market. 

Figures from the financial regulator show that six in 10 pensions with a GAR saw this benefit sacrificed. In most cases, retirees chose to take their savings as cash.

If it’s not clear from your paperwork whether you have a GAR, phone your pension provider and ask.