Money
Pensions
Annuities - it pays to shop around
Retiring investors can boost their income if they shop around for the best annuity instead of taking the one offered by their pension provider, writes Holly Thomas
Each of us has the right to exercise our Open Market Option (OMO), which means we can shop around for the best rate, and use the money for an annuity with any company we choose.
By shopping around, you can boost your annuity income as much as 20 per cent, according to research. This means you get 20 per cent extra income every month for life.
The most recent figures from the Association of British Insurers, show that between April and June this year, 118,000 annuity contracts were bought, with a total premium of £2.65 billion. Some 76,000 were bought from the same provider with premiums of £1.35 billion, while 42,000 were from a different company from the one the pension was with, paying out £1.3 billion.
Your provider should inform you about the OMO in writing around six months before your pension can be taken. But it is likely to include an offer of an annuity, which to accept, simply requires signing and returning a form – which is of course the easy option, but not necessarily the most fruitful.
Buying the right annuity is an extremely important decision, more so because it's a one-way street - once you've signed up and handed over funds, you can't change your mind, switch to another, or have your money back.
As savings rates languish at their lowest levels in decades, and the state pension remains pegged to inflation rather than earnings, getting the most for your pension pot is a must.
The amount of money you secure depends on the annuity rate you lock into. Annuity rates are different between all providers - in fact, the gulf between the best and the worst is vast in many cases. They each calculate the rates they offer according to a number of factors, including interest rate movements, and as the base rate has fallen, so have annuity rates. Yet in recent months, annuity rates have started to recover slightly.
Pensions experts expect an increase in the number of annuities bought over the coming months thanks to an improvement in rates, but also because of the baby boomer generation starting to retire.
It is vital to get professional advice and guidance when you purchase your annuity. You need to get it right first time.
* Written by Holly Thomas. The opinions in this article, published on October 5, 2009, are Holly's own and for general information only. Always seek independent financial advice.
