There are plenty of people who, having reached retirement, will decide the type of product that most suits their income needs is one that provides a guaranteed income for life, such as an annuity.
There are many reasons why an annuity appeals to some people more than others, but pensioners will often favour annuities because they are not willing to take the risks associated with investing in the stockmarket through income drawdown.
A common mistake made by those who opt for an annuity is failure to shop around and seek advice on the best product for them.
While the concept behind an annuity is fairly straightforward – the person hands over their pension pot and from then on receives an income for the rest of their lives – there are some complexities and variations, particularly if the retiree suffers from ill health.
Simon Bashorun, financial planning team leader, Investec Wealth & Investment, says: “While annuities may seem straightforward on the surface, there are a multitude of options that can be built in at outset, including benefits for the surviving spouse, indexation and guaranteed payment periods to name a few.
“Even once these options have been understood, finding the provider offering the best rate in the market can be a challenge, particularly when what an individual might feel is a relatively minor health condition could secure a significantly higher annuity rate from a provider specialising in enhanced annuities.”
He acknowledges there are online comparison tools available to those approaching retirement but recommends seeking appropriate professional advice.
“Annuities in the conventional sense, once established, cannot be altered and therefore making a mistake at outset could prove costly in the future,” he adds.
Assessing the market
Kim Lerche-Thomsen, chief executive of Primetime Retirement, agrees clients must assess the entirety of the market in order to find the optimum annuity choice and notes a good independent financial adviser should do this for them.
“This includes fixed-term annuities that are ideal for those who want to keep their options open, with potential benefits such as higher rates if their health deteriorates or if interest rates do eventually rise,” he advises.
“Enhanced annuities should definitely be considered by advisers if their clients are already suffering from poor health. I strongly believe annuity rate tables should also include rates of fixed-term products alongside them, so fixed rates can be included in the conversation.”
Also important is that clients choosing an annuity should be informed of the ‘cooling off’ period they are allowed, according to Jinesh Patel, vice-president of investment consulting at Redington.
“Picking an annuity with the most attractive rates is clearly important – clients should be encouraged to shop around for the best deal – but they should also be made aware of the cooling off period that usually lasts for up 30 days before payment is made. This prevents clients from making a decision, or worse, being intimidated into a decision that isn’t right for them,” he suggests.