Choosing an annuity by shopping around is definitely in fashion
The difficulty with telling the story of how financial planning can help you fund both your life and how to plan retirement is that it competes with many more immediately attractive sources of interest.
The news, for one. A never-ending parade, or so it would seem, of either how things will never be the same again while, at the same time, opining that they can only get worse.
Where to begin? Why not with a chink of sunlight amidst the existential gloom.
So let’s talk about annuities.
Before the advent of pension freedoms, most people were obliged to buy an annuity with their pension pot – some 400,000 a year. For those who don’t know, you handed over what was in that pot to an insurance company who gave you a guaranteed income for life.
As one bright spark put it: “Like a mortgage in reverse. You give the whole amount to the annuity provider and they give you back regular payments from it.”
After 2015, you had more control over what you did with your pension. Despite dire warnings from the “experts” ie journalists gleefully orchestrating Lamborghinis-instead-of-an-income-for-life headlines, most took sober, cautious choices with their savings.
But one thing people didn’t actually do in large numbers was buy an annuity. Very broadly, low interest rates – and they have been historically low for some 13 years – translate into unattractive annuities. Put simply, at that time, your money didn’t go as far as you thought it could.
If, by falling through some cosmic wormhole, financial products designed for retirement were judged by fashion parade, annuities would have been the flared trousers and kipper ties elbowed off the catwalk by the glitter and sashay from the Freedom and Choice House of invest-in-what-you-want and digital drawdown platforms
But if an income that is guaranteed for life is quality, surely that never goes out of style?
Now that interest rates are climbing, albeit from a very low point to 1.75 per cent, has this meant a fresh perspective for annuities?
In a nutshell, you get more for your money and to do so, you must compare every annuity on the market.
That’s because you’ll be surprised at the difference between amounts your pot can buy you.
Using Pension Potential, our online, guided annuity service, you can see for yourself. We created a fictional persona to illustrate the impact.
Smokes 15 cigarettes a day since the age of 20
High blood pressure
£150,000 pension fund
£37,500 tax free cash taken /£112,500 to purchase an annuity
Highest Rate £7,421.52 - Aviva
Lowest Rate £6,141.24 - L&G
That’s a difference of £1,280.28 each year or £106.69 a month. A 20.84% uplift between the two. There were others in between but you get the picture.
In this example, smoking and high blood pressure generally mean a better rate because, frankly, your lifespan is expected to be shorter. Mrs Murray’s days may be numbered but she will be able to afford to smoke in the meantime.
But isn’t nearly £1,300 a year more worth having? That could be an annual holiday. Or £106.69 a meal out every month? Or something to tuck away for the grandchildren? It’s more money in your pocket, however you decide to spend it and it was only found by shopping around.
While those of us who remember it wish today’s astronomical everyday prices resembled those from the era of flares and kipper ties, what we didn’t have back then was this kind of comparison at our fingertips.
Finding an annuity is one thing, researching it another but setting it against every other annuity on the market on your smart phone or computer? That’s bang up to date.