Don't miss out on a richer retirement

by Bob Bullivant on 26 November 2010  |  5 comments
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Guest blogger Bob Bullivant explains why ignoring the open market when shopping for an annuity could cost you a small fortune.

How often have you heard the words ‘there is no such thing as a free lunch’? In normal circumstances I would agree but there is really a very good opportunity to enjoy regular free lunches at the expense of insurance companies.

You see when you buy a personal pension or a defined contribution company scheme, your pension money builds up with your chosen provider. This is what the boffins call the accumulation phase, when you are aiming to grow as big a fund as possible.  When you reach retirement the boffins then introduce you to the decumulation phase (they have a lot of imagination!). This means that you will be offered a tax-free cash sum from the fund – usually 25% - and then you need to decide how to take your income. The usual way is through an annuity, which is a method by which you exchange your accumulated savings for a guaranteed income for the rest of your life.

This is where you really need to be alert to the small print. Your provider will be keen to entice you to take your income with them and you may receive phone calls and nice marketing packs. However, it's important to remember you do have the option to take your fund to the open market and to find the best possible rate.

Why would you do this? Quite simply, because you could get more money for the rest of your life. If you just take the first offer from your insurance company you may be less wealthy than you otherwise might be.

The amount you get will depend on a number of factors. The main ones are how long you will live and the interest that the insurer can obtain on your fund. This will then vary depending on whether you want to add a pension for a partner if you die first and most importantly on the health of you and your partner.

Here's why health is so important. You are handing over a lump sum to the insurer in return for which they will guarantee to provide you with an income for the rest of your life. They employ some very clever mathematicians called actuaries who calculate how long an individual in good health is likely to live. It will follow that if you have suffered a medical condition, or if you have smoked for a number of years, then you are likely to live less long than someone who is completely fit. This means that your fund has to last for fewer years and so you can have a larger income.

So, how do you go about finding the best rate? The answer is to shop around, but this does not mean that you have to make numerous phone calls to a multitude of insurance companies. All annuity rates include an allowance for someone who is appropriately qualified to do this for you. This is usually about 1.5% of the fund. Regardless of whether you take this advice the insurer will make the charge and if you do not ask for advice then the insurer will once again have a free lunch.

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The key to finding an adviser is to ensure that they approach all insurers for a quote – some operate a limited panel which means that not every provider will be asked to quote.

If you have suffered a lifestyle or medical condition then you will be asked to complete a common medical questionnaire. There is one form that is accepted by all eight insurers who will consider medical history. When the results are back they will be collated and the company offering the highest income will be recommended to you. 

It is a sad fact that only one in three people opt to take their pension fund to the open market. This means that two in three people are making a decision (conscious or otherwise) to potentially take less income for life. I really find this hard to accept and Annuity Direct has been campaigning hard to have the availability of the open market option made more transparent.  There is no doubt that Annuity Direct will benefit if it is made more transparent but the big point is that so will many many thousands of pensioners. Each year about 500,000 people retire and take benefits – I would love to see them all secure in the knowledge that their retirement income is as high as it can be. For some, this will be by taking their annuity with the ceding provider whilst for others (in my view the majority) this will be by taking the open market option.

Remember that this really could be a free lunch – and if you do not dine, then the insurance company will – at your expense.

Bob Bullivant is the chief executive officer of independent retirement planning specialist Annuity Direct. For more, visit their website, or call 0500 50 65 75