When your pension pot matures, your provider will likely send you a quote for an annuity. It’s tempting to accept this offer – after all, they’ve managed your money for years, and it seems like the natural next step. However, this decision could cost you tens of thousands of pounds over your retirement. The “open market option” – your right to shop around for the best annuity deal – is one of the most valuable financial rights you have, yet many retirees don’t exercise it.
The default trap: why staying put costs you
Loyalty doesn’t pay in annuities
Your pension provider has no obligation to offer you their best rate. In fact, they may assume you won’t shop around and offer rates that are deliberately uncompetitive. Insurance companies make significant profits from customers who accept default quotes without comparison shopping.
One-size-fits-all doesn’t fit anyone well
Your pension provider’s annuity quote is based on standard assumptions about your health, lifestyle, and circumstances. They’re not tailoring the product to your specific needs or taking advantage of factors that could increase your payments, such as health conditions, smoking history, or lifestyle factors.
When shopping around matters most
You have health issues
If you have any health conditions – from diabetes and high blood pressure to more serious conditions like cancer or heart disease – you could qualify for an “enhanced” or “impaired life” annuity. These pay significantly higher rates because your life expectancy is statistically reduced. Your pension provider may not offer these products or may not have competitive rates.
You’re a smoker or former smoker
Smoking history, even if you quit years ago, can qualify you for better annuity rates. Some providers specialize in smoker annuities and offer rates that are 20-30% higher than standard rates.
You want specific features
If you need particular features like inflation protection, survivor benefits, or guarantee periods, different providers excel in different areas. Shopping around ensures you get the best combination of rate and features.
How to shop around: A step-by-step guide
Step 1: Gather your information
Before you start shopping, compile all relevant information:
- Your exact pension pot value
- Your health history and current conditions
- Smoking history (including when you quit)
- Your postcode and lifestyle factors
- Your desired annuity features (indexation, survivor benefits, etc.)
- Your preferred payment frequency
Step 2: Understand your options
Direct Approach: Contact annuity providers directly. This gives you full control but requires significant time and effort.
Online Comparison Services: Use an annuity broker who specialises in retirement income. They have access to the entire market and often do not charge for their service because they earn a commission from the insurance company.
Financial Advisor: A qualified advisor can provide comprehensive retirement planning alongside annuity shopping, though this typically involves both initial and ongoing advisor fees.
Step 3: Disclose health information fully
Be completely honest about your health and lifestyle. Even minor conditions can improve your rates, and failing to disclose relevant information could invalidate your policy.
Step 4: Compare total value, not just rates
Consider the entire package: the provider’s financial strength, customer service reputation, flexibility of payments, and additional features. The highest rate isn’t always the best deal if it comes from an unreliable provider.
Step 5: Act within your window
Most providers hold quotes for 15-30 days. Don’t rush, but don’t delay unnecessarily. Market conditions and rates can change, and your pension provider may have deadlines for transferring your fund.
The bottom line: is it worth it?
For most retirees, shopping around for an annuity is absolutely worth the effort. The potential financial benefits far outweigh the time and effort required. Even if you ultimately choose your pension provider’s offer, you’ll have the confidence of knowing you made an informed decision.
The process has become significantly easier over the years, with better online tools, more professional brokers, and streamlined application processes. Most people find the experience less daunting than they initially feared.
Taking action: Your next steps
- Start Early: Begin the process 3-6 months before you plan to retire. This gives you time to explore options without pressure.
- Organise Your Information: Gather all relevant health, lifestyle, and financial information before requesting quotes.
- Set Your Priorities: Decide what’s most important to you – maximum income, survivor benefits, inflation protection, or flexibility.
- Get Multiple Quotes: Whether directly or through a broker, ensure you see options from at least 3-5 providers.
- Take Your Time: This is a lifetime decision. Don’t rush, but don’t procrastinate unnecessarily.
- Seek Help If Needed: If the process feels overwhelming, a specialist broker can provide valuable assistance.
Conclusion
Your pension represents decades of saving and sacrifice. Don’t let loyalty, inertia, or intimidation prevent you from securing the best possible retirement income. Shopping around for an annuity is one of the most valuable financial actions you can take as you approach retirement.
The open market option exists to protect consumers and ensure competitive pricing. Use it! The few weeks invested in shopping around could provide financial benefits that last throughout your retirement. Your future self will thank you for the effort invested in securing the best possible annuity rate.