Why you must shop around for your annuity
Feb 27, 2009
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Hundreds of thousands of pensioners are missing out on £1.4bn a year, says Steve Hunt of Rockingham Retirement. The problem affects those with 'money purchase' schemes, rather than final-salary, or 'defined benefit', schemes. On retirement, anyone with a money-purchase pension pot can take up to 25% as a tax-free lump sum. The rest is turned into an annuity, in effect an income stream paid during retirement. But although retirees are free to shop around different insurers and track down the best annuity rate (and hence the highest retirement income), many don't.
According to the Association of British Insurers, in 2008, 169,000 people, just 37% of the total, turned down the annuity on offer from their pension provider. That was down on 2007's figure of 170,000, even though the Financial Services Authority's rules now require pension providers to make clients aware of their right to take the 'open market option' (OMO). Not taking the OMO could be a costly mistake. According to Suzanne Greener of Pensions Moneyfacts, the difference between the best and worst standard open market rates ranges between 15% and 21%, depending on the age and sex of the retiree, for someone with, say, £50,000 to spend on an annuity. Overall annuity rates have fallen around 5% since December, so shopping around is more important than ever.
For those able to defer retirement, a money purchase pot can be converted into an annuity at any age between 50 and 75. So you could defer cashing in your plan until both asset prices and annuity rates recover, but still draw down income from it to live on in the meantime. You can draw down up to 120% of the annual pension that could have been purchased while leaving your capital invested. But the Pensions Advisory Service only recommends this route if you have a money purchase pot of at least £100,000.
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