Money

Pensions: Annuities that can make your income grow

Finance

26 March 2009 16:29

Choosing the right annuity can make your income grow. Yours discovered how you can cash in...

Grandmother of three Lori Monksfield (60) heard she could get a better income by shopping around for her annuity rather than taking the income from the pension provider she’d been saving with. An annuity is an insurance contract which pays you an annual income for the rest of your life.

Maximise your income

“It was only a small pension, so I wanted to get the best possible return,” says Lori, an export co-ordinator from Grays, in Essex.

“I discovered I could get £848 a year rather than the £704 on offer from my provider – some 20 per cent more. I was shocked but delighted.”

However, Lori is in the minority. Every year, 150,000 over-50s take the annuity offered by their personal provider, unaware they can boost their retirement income using what’s known as the ‘open market option’.

The rewards for shopping around are high and you could get an extra ten to 15 per cent a year, more if you have suffered from ill health. This is because big companies don’t compete with each other for the annuity, so they pay out a lower income.

Make the wrong decision though, and you’re stuck with a lower income for life. You can’t transfer to another scheme, so it’s essential you get it right.
“The process isn’t complex. I would recommend that everyone should do it,”
says Lori.

Some annuity providers offer better rates to women than others, although they will always pay out less to women than to men because women live for longer.
“Historically, Norwich Union has been keen on women,” says Peter Magliocco, associate director of the Alexander Forbes Annuity Bureau (call local rate 0800 071 8111). “Also, if your health isn’t good or you smoke, statistically your life expectancy is lower than a healthy person, so you could get a higher pension with an enhanced or impaired life annuity.” Prices are based on your individual circumstances.

Enhanced annuity

“This is well worth considering even if you don’t feel ill,” says Francis Klonowski, certified financial planner with Klonowski & Co. “You can qualify for an enhanced annuity on mild medical grounds such as high blood pressure, high cholesterol or being overweight.” An estimated 40 per cent of people should buy an enhanced annuity.

Beyond your health, you can also consider a policy priced according to your postcode. “Legal & General is the only provider currently using this method to determine more precisely those who are likely to live longest. The idea being if you live in a leafy village, you’re more likely to have had a good diet and no manual job, so statistically likely to live longer than someone living in a less pleasant suburb,” says Francis.

It can make a five per cent difference to your quote. However, Francis says there’s one situation where shopping around may not make sense. “If your pension provider offers you a ‘guaranteed annuity rate’, you may be better off staying with it but this doesn’t always apply and you need to check carefully before you make any decision.”

If you are healthy, you may have to consider an alternative method to boosting your retirement income.

One option is to put off buying an annuity for a few years. You can do this through income draw-down, which allows you to leave your money invested and take income from the capital.

For more information, call the Pensions Advisory Service, a free, government funded internet and telephone advice line. Its website pensionsadvisoryservice.org.uk has an annuity planner, which guides users through the steps they need to take to convert their pension.

Do it now

Call the Pensions Advisory Service on 0845 600 0806 where you will find a special helpline set up for women who want advice on their pension options.

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