This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Julian Webb, Head of DC and Workplace Savings at Fidelity explains how you can boost your pension.
The Association of British Insurers’ new ‘Annuity Window’ service is a good addition to tools available to help savers shop around for the best annuity available to them. Providing comparisons of the rates available from different providers, the service shows people what’s out there beyond the range of their current savings provider. In itself, this is a good thing. We’ve long urged retirees to shop around for the best annuity available to them. However, rates are only one part of the story. To make the most of their retirement savings, people need to consider the shapes and types of annuity – or whether they want an annuity at all – before making this cliff-edge decision.
Those looking to secure their retirement income need to be sure they are considering all of the options, and in the case of annuities, whether the style and terms suit their personal circumstances. From marital status to health conditions, annuity providers offer differing income depending on an individual’s needs and life expectancy. Whether savers wish their spouse to receive income after their death, or to protect their future income from inflation, there is more to be considered than the headline rates the ABI shows.
Some providers pay a significantly higher income to those with a history of poor health or those who smoke, for instance. Payments could increase for these people by 16% a year – and on a pot of £50K, this equates to an increased income of £7,900 over twenty years. Relying solely on annuity rates when planning for retirement income could lead to savers being locked into a pension for the rest of their lives that doesn’t suit their needs.
Of course, some people will decide that an annuity isn’t for them at all, opting instead for drawdown strategies to make the most of their savings. For those people retiring with pensions savings in excess of £100k, they may want to consider pension drawdown as a viable alternative or even phasing their retirement and purchasing a number of smaller annuities over time to potentially benefit from increased annuity rates at a later date. These are considerations that should not be ignored by customers at the expense of the traditional annuity offering. This is the reason that we strongly urge customers to seek professional help in securing their retirement income so that all possible options are not overlooked.
Lifetime or fixed term, single life or joint, escalating or flat income: choosing an annuity is a complicated business, and there’s a danger of information overload when going it alone to plan for retirement income. For this once-in-a-lifetime decision, seek guidance from the experts and never settle with the first option you’re offered.
