Why you need to shop around for an annuity

More and more people are going to find they will need to buy an annuity at retirement. This is because more employees are now members of group money purchase occupational schemes, group personal pensions or group stakeholder schemes - all of which require either the scheme trustees (for an occupational money purchase scheme) or the individual to buy an annuity with part of the pension fund.

However, annuities are not only becoming more expensive, they are also becoming more complex, which is why it is so important to take independent financial advice and shop around when buying one.

Anyone with any form of personal pension has the facility to take his/her pension fund money to another insurer, which offers better annuity rates than the insurer which administered the pension, in order to buy an annuity.

Yet despite the chance of improving your income for life by up to 40% by shopping around, the number of people doing so remains stubbornly low - at around one in three annuitants. Presumably the rest stay with their existing insurer, either out of ignorance or inertia.

This is despite the fact that insurers are required to explain the facility to shop around (called the open market option) in their literature to policyholders who are nearing retirement.

Clearly the message is not getting through that an annuity is for life and that once you have made your choice, you cannot switch to another provider. Bear in mind that if you have a serious medical condition or unhealthy lifestyle you could obtain the best rates by purchasing an impaired life or lifestyle annuity.

The former are paid to those with a life reducing medical condition such as cancer, heart disease or stroke, while the latter are paid to those who smoke (more than 10 a day), or are obese.

Interestingly, there has been a small increase in the number of people taking up these special annuities, which is great news for them, but bad news for the rest of the healthy pool of annuitants whose rates are likely to be depressed by the loss of the cross subsidy which those in poor health gave to those who lived longer than expected.

Furthermore, the annuity market is becoming more sophisticated with annuity rates being more tailored to your likely life expectancy, based on factors such as occupation and where you have lived during your life, as well as gender, health and age.

This is because there is a strong correlation between where you live and your life expectancy, with males living in West Dorset having one of the highest average life expectancies, compared to men living in Glasgow who can expect to live significantly shorter lives than that for the average British male (this may or may not have something to do with deep-fried Mars Bars... ).

Norwich Union is conducting work on the feasibility of offering post code annuities based on such information, so that annuity rates would be more closely matched to your likely life expectancy than ever before.

All of which is likely to mean lower annuity rates for the healthy and a greater need to shop around then ever.

09 May 2005 © Moneyextra.com

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