Warning over easy pension mistake that could cost you £14,500 in retirement – key tip to get the best deal

A WARNING has been issued to pensioners looking to boost their retirement fund.

Experts are warning an easy mistake could actually cost you £14,500 in your golden years.

Annuities are retirement plans that pensioners can buy to get a fixed regular income for the rest of their life.

Buying an annuity is usually an irreversible decision, so it’s crucial to consider your options, choose the right type and get the best deal you can.

Rates are usually shown as how much money you'll get per year for every £100,000 you pay in.

For example, an annuity rate of 5% would mean you'll get £5,000 for every £100,000 you invest - so if you paid an annuity provider £50,000, you'd get £2,500 a year.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown told The Sun: "An annuity is for life, or at least your life in retirement.

"Once bought you can’t unwind it, so if you make the wrong decision, you could regret it further down the line."

Data from Hargreaves Lansdown shows that a 65-year-old with a £100,000 pension looking for a single life level annuity with a five-year guarantee can get anything between £6,532 and £7,255 per year depending on which provider they go with. 

That’s a whopping £723 per year difference.

Over the course of a 20-year retirement, this could add up to £14,500 less retirement income.

"With these kinds of figures in the mix you don’t want to take the chance that your provider happens to offer the best rate – it’s well worth taking the time to check what else is out there," Helen explained.

It means that shopping around for the best rates is key to boosting your savings and making sure you're not losing out.

As you get closer to retirement age, your pension provider will send you information about the value of your pension pot and the options available to you to take money from your pension.

Some pension providers can offer you an income directly.

But it's important to remember, you don’t have to take an annuity offered by your existing pension provider.

You’re free to shop around and buy your annuity from any provider – and you might find a better deal by doing that.

Helen said: "Shopping around for the best rate is absolutely vital, and yet the latest FCA Retirement Income data shows almost half of annuities bought in 2022/23 were from the existing pension provider."

The differences between the best and worst rates get even bigger when you bring health into the equation. 

A 65-year-old who discloses that they smoke ten cigarettes a day could get as much as £7,507 per year. 

If you suffer from a condition such as diabetes, then you could get several hundred pounds per year more, Helen said.

That's because your health is linked to your life expectancy.

If you're in poor health, smoke or have another lifestyle condition, you'll be expected to live for a shorter time, so you'll get a better annuity rate.

Helen said: "Many people may feel uncomfortable disclosing these details as they think they will be penalised.

"However, it is vital you put as much information as you can on the form as it could make an enormous difference to the income you receive long-term."

How to purchase an annuity

Below is a step-by-step guide on how to buy an annuity from the consumer experts at Which? including how to shop around.

1. Wake-up pack

Up to six months before you retire, your pension provider will send you a "wake-up pack".

This will tell you the value of your pension pot, your pension options, the different annuity types available and the benefits of shopping around, rather than taking the annuity offered by their provider.

Your provider will have to state which annuity types it does and doesn't offer.

2. Follow-up pack

Ten weeks before you retire, your pension provider will send you a follow-up pack.

Neither this pack nor the wake-up pack will contain application forms for taking out an annuity.

Follow-up packs stress the importance of making a decision.

3. Consider taking financial advice

Once you've been made aware of your options, you can choose to take financial advice on what decision you should make.

Your adviser should ask you:

• Whether you're married or have a partner
• Whether you have any medical/lifestyle conditions
• Whether you're concerned about your annuity losing value because of inflation
• Whether you're taking any small pots as cash and whether you have any other pension pots

A comparison site is a good place to start when looking for an adviser, with Unbiased and VouchedFor being the biggest, according to Which?.

If you don't visit a financial adviser, your pension provider must make sure you've answered these questions.

4. Shop around

If you decide not to visit a financial adviser, you can shop around for your annuity yourself - doing this almost always gives you a higher income in retirement.

You can use tools such as the Money Helper's annuity comparison tool, or use annuity brokers to find the best deals currently available in the market, and tailored to your circumstances.

You can find a broker online but make sure you check reviews and fees before signing up.

Only non-advised providers will give you a quote without you taking advice first.

They will simply offer you the best rate they can find in the market.

There may be annuity providers offering higher rates via only a financial adviser.

5. Get a personalised illustration

Your potential provider will give you a personalised illustration of your annuity, including a quote, your options and why you should consider certain product types - such as an enhanced annuity.

6. Get your income within 30 days

If you've used the open market option, once you've decided which annuity you'd like and which provider you're going to purchase it from, your pension provider will release your funds to your new provider.

Your annuity should be set up within 30 days.

What are my other options?

If you want more flexibility about how much to take as income – and when – you may want to consider a different approach.

So what are the alternatives?

Drawdown

These days, most retirees opt to leave their pension invested in the stock market, and take income as and when they need it, via "drawdown".

As with an annuity, you can withdraw 25% as a tax-free lump sum, with the rest taxed in the same way as income.

Drawdown provides more flexibility than an annuity – and returns may be higher – but there are risks.

Savings are exposed to greater volatility. If there is a stock market crash, the fund value will fall, meaning your income needs may not be met.

If you are considering a drawdown, you should seek financial advice.

Take small cash sums

Another option involves you leaving your pension pot invested, and withdrawing lump sums as and when you need to. But note that not all schemes allow this.

There may also be limitations on the number of withdrawals each year.

Cash it all in in one go

If you so wish, you could close your pension pot and take it all as cash.

But this will not give you a secure retirement option.

It could also land you with a hefty tax bill. Tread very carefully and seek advice.

Mix and match

Note that you are not limited to picking one option. You can mix and match as suits your needs.

This might, for example, involve using some of your pot to purchase an annuity, while leaving the rest invested and drawing an income from it.

In many cases, a combination can work well.

Leave your pot untouched

If you already have enough income to live on, you might want to think about delaying taking your pension to allow a fund to continue growing.

By putting off retiring, you will have more money when you do eventually stop working.

Consider delaying your annuity purchase

Even if you decide not to buy an annuity when you retire, it could still make sense to do so at a later stage in retirement, as you are likely to get a better rate when you’re older.

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