Retirees buying an annuity are often missing out on thousands of pounds by sticking with their current pension provider instead of shopping around for the best rates, exclusive data for MoneyWeek shows.
Annuities are making a comeback with another post-pension freedoms record for sales last year, according to the Association of British Insurers – which reported 1,700 annuities were sold every week, up by a quarter on 2023.
But separate data from the Financial Conduct Authority found as many as four in 10 of those buying annuities buy them from the same pension company they saved with for decades.
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This is often not the best way – because there is a big gulf between the best and worst annuity rates on offer.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Once bought, an annuity cannot be unwound so it’s hugely important that you look across the market to get the best quote for you.”
Hargreaves Lansdown ran the numbers for MoneyWeek to see what annuity rate a 65 year old with a £100,000 pension pot could get.
The annuities on offer ranged from anything from £8,051 to £7,667 per year for a single life level annuity with a five year guarantee.
That’s a difference of £384 per year – and £7,680 over the course of twenty years.
Getting the wrong type of annuity can also cost you dear. Current Hargreaves Lansdown data shows someone disclosing their 10 a day smoking habit could get up to £8,280 per year – more than £200 better than the best standard rate.
If they had a condition such as diabetes this could also add several hundred pounds per year more than a standard annuity.
Hargreaves’ Morrissey said: “The difference between the best and worst quotes can be several hundred pounds per year and this can have a material effect on your lifestyle.
“Over the course of a twenty year retirement the gap can grow to well over £7,600 so taking the first quote offered could prove to be a costly mistake.
“Taking the time to use an annuity search engine to see what the market can offer you is time very well spent.”
What is an annuity?
An annuity is a way of securing a guaranteed income in retirement. You use your pension pot to ‘buy’ an annuity, and in exchange a pension provider gives you an income forever, often rising in line with inflation. The amount you get per year is known as the ‘rate’.
Annuities initially fell out of favour after pension freedoms were launched on 6 April 2015, when it became possible for retirees to access as much of their savings from their defined contributions pension scheme as they wanted from age 55.
Previously most people had to buy an annuity, and this wasn’t great for retirees during the decade after the financial crisis when interest rates – and so annuity rates – were at rock bottom.
Now interest rates are higher again, annuities have come back into fashion, especially as people are worried about the cost of living and stock market volatility and so are seeking a guaranteed income for life.
But buying an annuity is a big decision – once bought you can’t change your mind. Furthermore, in many cases, your annuity payments will simply stop when you die, though some annuities do allow a loved one to inherit during a ‘guarantee period’.
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