Five annuity mistakes to avoid

Chris Torney / 07 October 2016

We’ve listed five potential annuity pitfalls you can easily avoid.

Buying an annuity is one of the biggest financial decisions you can make. 

It is likely to cost many thousands of pounds and, although the government once planned to make it possible to trade in annuities from next year, these plans were scrapped in October 2016 (read more: Plans to allow annuity sales scrapped) so you must view your annuity purchase as an irreversible step.

With that in mind, here are five potential annuity pitfalls you should make every effort to avoid.

1. Accepting the first offer

When you reach your pension scheme’s retirement age, your pension provider will write to you to talk about your income options. The chances are, they will give you a quote for an annuity as well.

However, it would be foolish to accept this quote without working out whether the type of annuity they are offering is right for you, and without checking if you can get a better deal from a rival provider.

Always shop around for the best possible rate: doing so could mean thousands of pounds in extra income over the course of your retirement.

Can you treble your pension pot?

2. Hiding medical problems

Unlike medical or travel insurance, for example, you could get a better annuity rate if you are in poor health. 

Income levels are based on life expectancy: the longer an annuity provider expects to pay out for, the lower the monthly rate will be.

When you apply for an annuity, be sure to mention any health issues you face, such as whether you smoke or suffer from conditions such as diabetes, heart disease or cancer.

Informative, in-depth and in the know: get the latest money news with Saga Magazine. 

3. Ignoring inflation

Standard annuities pay a flat level of income for the rest of your life. But if you sign up for one, there is a big risk that your income will be eroded by the effect of rising prices.

You should therefore consider taking out an inflation-linked annuity: although this means that payments will be lower in the early years, it could offer you much-needed protection against price increases later in your life.

4. Forgetting your spouse

It is worth thinking about what happens to your spouse if they are relying on your income in retirement and you die before they do. Joint annuities guarantee to keep making payments to a surviving partner after the holder’s death.

Annie Shaw: How can my wife boost her pension income?

5. Putting all your eggs in one basket

New pension rules introduced in 2015 mean that you don’t have to buy an annuity when you reach retirement: instead, you can leave your fund invested in the stock market and hopefully benefit from future growth.

Increasingly, people are taking a mix-and-match approach to their retirement finances, with part of their pension funds used to buy an annuity and the rest left invested. 

There may be no need to put all of your savings into an annuity, so make sure you explore your options and seek advice if necessary to work out what approach suits you best.

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The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.