Best annuities pay 16% more as rate gap widens to 4-year high

Research from provider Just shows the gap between best and worst-paying annuities has widened to a four-year high, meaning those failing to shop around could miss out on substantial sums.

Returns on enhanced annuities, where products are priced based on a person's health or lifestyle, are even greater.

According to Just, a 65-year-old in good health using £50,000 of pension to purchase a standard guaranteed income for life could generate £3,378 a year from the best deal compared with £2,900 from the worst.

The difference is £478 a year, or about £12,000 over a 25-year retirement. 

Stephen Lowe, group communications director at Just Group, said: "It’s a competitive market and the chances of your own provider offering the best deal are small. This is a case where being loyal can cost you lost income for the rest of your life.

"It’s important to disclose health and lifestyle information which allows providers to generate personalised rates which could be higher – sometimes significantly higher – than the ‘standard’ rates published in the newspapers and online which are usually based on people in good health."

This month the difference between the best and worst annuity rates has climbed above 16 per cent, compared to an average difference over the past four years of about 9 per cent, Just found.

Guaranteed income for life rates are repriced regularly depending on conditions in the financial markets, which makes timely comparisons necessary.

Steven Cameron, public affairs director at Aegon, said: "The huge macro-economic volatility we’ve seen recently including with gilt yields has had a major impact on annuity rates.

"Each annuity provider will have been assessing their own rates accordingly and it’s not surprising that the difference between the best and worse has widened. So now more than ever it’s a ‘no-brainer’ to shop around, ideally seeking advice or support from Pension Wise."

Nick Flynn, retirement income director at Canada Life, said too many people are still not shopping around.

“People often sadly simply accept on face value the offer put to them by their current pension provider. This is likely due to inertia, and therefore they ignore the warnings that by shopping around they could potentially secure a better income for life," he said.

He added: "While the market is fiercely competitive in the open market, with five providers competing for every case, a captive audience means there is simply less commercial pressure to provide the best rate for those who don’t shop around.

"It’s also important to remember, it isn’t just about securing the best rate, it’s also about securing the best shape annuity to protect the value of the income for other beneficiaries."

Lowe said the Financial Conduct Authority's retirement income market data showed nearly 70,000 annuities were bought by retirees in 2021-22 with an average value of about £75,000.

“This is one of the biggest financial decisions a retiree will make and one that can’t be undone, so it is important to fully understand the options and not rush."

He added: “It’s important to disclose health and lifestyle information which allows providers to generate personalised rates which could be higher – sometimes significantly higher – than the ‘standard’ rates published in the newspapers and online which are usually based on people in good health."

carmen.reichman@ft.com