Let’s give some thought as to how most of us go about buying our retirement income. Retirement for most people involves using the pension pot built up over many years to buy an income. However, many people think that they have to use the same pension company that they have invested with all along, to provide their annuity income. And these companies do not appear too keen to tell them that they don’t have to, and that people can shop around for the best annuity rates and a higher retirement income.
But, almost every retiree has the right to exercise what the financial services industry calls the ‘open market option’ (OMO). In plain English, this means taking your pension fund and buying a better annuity income elsewhere.
It is common for specialist annuity providers to offer a better annuity rate than the company with which you built up your pension fund, and annuity quotes can show quite a range of rates available. The exception to this general rule is where you have a guaranteed annuity rate built into your pension contract. But beware; this option normally only applies at a set age and on a level, single life basis. So if you want to retire that bit earlier – or later – or you want to provide an income for your spouse as well, then the guarantee is lost.
There is another consideration. If you are a smoker, or have a medical condition, you could also secure a better annuity rate, by picking the right type of annuity, an enhanced annuity. For example, the best annuity income for a 65-year-old non smoker wanting to use a £100,000 fund to buy a level income would have been £6,406 a year, whereas a smoker in the same position could have increased his income to £7,452 a year. These figures are taken from current annuity rates and demonstrate that shopping around is well worthwhile.
With annuity rates currently low, many people are considering delaying buying one and taking their tax free cash and leaving their pension fund to grow, and possibly drawing an income directly from the fund. The hope is that pension fund values and interest rates rise, producing a better return in time as you get older when annuity rates tend to rise. However, this sort of retirement option requires specialist advice and is not suitable for everyone.
When it comes to annuities and retirement planning it is not all about annuity quotes and the best annuity rates. It is about finding the best retirement option for your own set of circumstances.
