Five steps to choosing the right annuity

Chris Torney / 07 April 2017

How do you go about choosing the annuity that’s right for you?

There are several types of annuities and different providers will offer customers differing terms, conditions and rates.

So how do you go about choosing the annuity that’s right for you?

Step 1: Look at your income options

When you reach retirement, you have a number of choices regarding how to use your pension savings to provide you with a regular income after you stop working. Annuities used to be the most common solution, but it is now easier to leave money invested in the stock market while taking a regular income – a process known as drawdown. You can even withdraw money from your pension and use it for other investments such as buy-to-let property.

Before looking for an annuity deal, you need to decide what your overall strategy is going to be: for example, do you want all of your pension fund to be used to buy an annuity, or do you want some to be left invested? Perhaps it would suit you better to wait a few years until you buy an annuity: the older you are when you apply, the more income you will get, other things being equal.

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Step 2: Work out your annuity requirements

At the most basic level, annuities guarantee to pay you a certain monthly income for the rest of your life in return for a cash lump sum up front. But there are a number of optional extras you could choose.

For example, do you want your annuity income to be linked to inflation? If so, you will get less in the early years, but your payments will keep up with rising prices.

And do you want the annuity to keep paying your spouse if you died before them? If so, look at joint annuities: but again, this extra protection means your income rate will be lower.

Step 3: Find out if you are entitled to a higher rate

If you have any health conditions such as diabetes, high blood pressure or heart disease, you could be entitled to a higher rate as you will probably be viewed as having a shorter life expectancy. Be sure to mention any medical problems on your application.

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Step 4: Shop around for the right deal

Get as many quotes as you can for the annuity you need: rates can vary significantly between providers and getting the most competitive deal now can mean thousands of pounds in extra income over the course of your retirement.

Use an online annuity comparison service to compare deals or talk to your financial adviser.

Step 5: Understand there is no going back

The government announced plans to allow annuities to be sold for a cash lump sum from April 2017, but scrapped them in October 2016, so now annuities are irreversible: once you have signed up, there is no going back.

This means it is vital you get the right kind of annuity and the best possible rate at the first attempt.

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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.