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Annuity customers reluctant to switch provider for less than £500 extra per year

Mature business woman with paperwork and a calculator at the kitchen table

An annuity converts some or all of the money in your defined contribution (DC) pension into an annual pension -- giving you a guaranteed income for life, or for a specified period. But it's important to make sure you're getting a good deal before you commit, or you could lose out on thousands of pounds over the course of your retirement.

You don't have to purchase an annuity if you don't want to. Since the pension freedoms came into force, fewer people are taking out annuities. But many people appreciate the security offered by an annuity, knowing that they will get a regular income for as long as they live.

One downside is a lack of flexibility -- even if your circumstances change, you can't normally cancel or amend your annuity. So it's important to take financial advice, think carefully before making a decision, and shop around to make sure you get a good deal. You don't have to buy your annuity from your pension provider.

According to consumer group Which?, every year people throw away an estimated total of £1bn in pension income by not shopping around.

Analysing the price point at which customers who plan to buy an annuity would consider switching provider, Canada Life found that £500 in additional annual income would be enough of a 'tipping point' to encourage people to shop around.

For customers who have a direct relationship with their pension provider (i.e. no financial adviser), the tipping point is slightly higher at £600 additional annual income. Conversely, among those who are already planning to shop around for their annuity the price point for switching is lower, at £350 a year of extra income.

Around two-thirds of DC pension plan customers who haven't taken an income from it, and intend to buy an annuity with at least some of their pension savings, plan to seek advice from an adviser or shop around themselves before purchasing an annuity, the research suggests.

Yet around one in ten people who plan to buy an annuity at retirement won't consider changing their provider, irrespective of the additional income that might be available from an alternative company.

"For those who choose to shop around for their annuity it can be easy to secure an extra £500 a year, or even more," said Nick Flynn, director of retirement income at Canada Life.

"Simply disclosing all lifestyle and medical information can lead to a welcome extra boost to your annual income which over time can add significant value. Over a typical retirement of 20 years, that extra £500 would equate to an extra £10,000 of additional income at no additional expense. Quite simply this is 'free' money.

"Remember, you can't switch annuity provider once you've set up a plan, so getting the most value from your hard-earned savings upfront is key. Never accept the first offer from your current pension provider, and do consider seeking help and advice."

Posted by Fidelius on January 31st 2022

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