According to the government pensions advisor – and former Saga Group director-general – Dr Ros Altmann, the difference between the best and worst standard annuity rates can be as much as 30 per cent. This figure can be greater still if the individual suffers from a medical condition that might reduce their life expectancy and is able to secure an “enhanced” annuity rate.
An annuity is an income for life purchased from an insurance company with some or all of your defined contribution (also known as money purchase) pension savings. They fall into two broad categories: “standard”, which are aimed at individuals with no significant health problems, and “enhanced”, which can provide a more generous income to those with medical conditions or lifestyle factors (such as smoking) that are deemed likely to reduce their life expectancy.
Other factors that are taken into account in the pricing of annuities include:
- Your age when you take the policy out.
- Whether you want the income to increase with inflation.
- Whether you need the annuity to continue to pay an income to your spouse after your death.
- Whether, if you do not require a full-blown survivor’s pension, you want a guarantee that your annuity will pay out for a given period even if you die before that period has elapsed.
- In some case, the average life expectancy in your postcode area.
Since 21 December 2012 providers have not been able to take account of an individual's gender when calculating annuity rates. The above list is not exhaustive and the pricing of annuities is a very complex area. Prices are also liable to change at short notice, so an advisor who understands the dynamics of the market and the practices of different providers can add significant value.
Most providers of defined contribution pensions will offer you their annuity as a default when your policy matures or you reach the retirement date agreed when you took out your plan. They are, however, legally obliged to allow you to take up the “open market option” and purchase an annuity from another provider, enter drawdown or take a “transfer value” and keep your funds invested and “uncrystallised” if you wish to put off your retirement.
We would urge anyone with a defined contribution pension plan to seek advice on the range of options available to them before accepting their provider’s default annuity.
To speak to one of Clarion Wealth Planning’s knowledgeable advisors about your situation please call 01565 653804 or send us an email.