For the purpose of converting a pension fund into an income on retirement, many of us will choose the option of purchasing an annuity. When you purchase an annuity, in return for a premium drawn from your pension fund you’ll receive a regular income for the rest of your life, or for a previously agreed fixed period of time, usually up to ten years.
The Bank of England recently announced a further round of quantitative easing which is likely to have the double effect of shrinking company pension funds and a further reduction in annuity rates. This means that many are left with a smaller pension fund to start with that is also likely to convert into a smaller annuity income.
So what steps are available for securing the best annuity deal possible in the current climate?
- Shopping around is always a good place to start, whenever you choose to purchase an annuity. You are not obliged to take any annuity deal offered by you pension fund provider, and in most cases you will be free to exercise your open market option and look around to find the best annuity deal to suit your needs. Even though annuity rates are at an all time low you may still be able to get a fairly good deal if you shop around, depending on your circumstances. You may be able to get a better rate, for example, if you suffer from ill health or if you are a smoker. Shopping around will also help you to decide whether you feel that now is a good time to buy or not.
- Taking professional independent financial advice can help you to make sense of the options on offer to you, and find the best deal in a sometimes complex and ever changing market. An advisor should also be able to give you fully up-to-date information on current annuity rates.
- Playing the waiting game may seem like an obvious way to deal with falling annuity rates, waiting to purchase an annuity until rates begin to climb again. It is wise to remember that annuity rates are likely to fall before they rise, so waiting could prove risky. On the other hand, if the state of the economy improves annuity rates too may show signs of improvement. Before deciding on whether you wish to wait to purchase an annuity you should take into account that you will suffer a loss of potential annuity income if you delay.
Purchasing an annuity is a big financial commitment. Once your purchase is made there will be no going back, and annuities can be expensive. You should research the market thoroughly before making any commitments, and if you’re unsure take professional advice. The current market is difficult and unpredictable, but with a few simple steps you may be able to improve your chances of getting a better annuity deal for your needs.
This guest post was written by John Hughes who is the resident blogger at Independent Financial Advisor, a small UK based site that provides access to independent financial advisors as well as to debt advice charities for those struggling with their debts.