Retirees lose out on £14,000 by not shopping around for best annuity deal

Pensioners are potentially missing out on thousands of pounds worth of income in retirement by failing to shop around for the best annuity deal. We explain what to do.

Woman at desk with paperwork
(Image credit: Getty Images)

Retirees are missing out on more than £14,000 by failing to shop around for the best annuity deal. 

According to research by Hargreaves Lansdown, the difference between the best and worst annuity rate is £723 a year, based on a 65-year-old with a £100,000 pension pot.

Over the course of a 20-year retirement, this widens to a £14,460 retirement income gap. Over 30 years, the retiree would lose out on a massive £21,690.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Annuity rates have risen over the past few years - in tandem with an increase in the Bank of England base rate - and sales have leapt 46%, reaching £5.2 billion in sales last year.

But experts are urging retirees not to blindly accept the annuity offered by their current pension provider. 

Instead, they should compare annuity deals from other providers to ensure they get the best rate.

“Shopping around for the best rate is absolutely vital, and yet the latest FCA data shows almost half of annuities bought in 2022/23 were from the existing pension provider,” comments Helen Morrissey, head of retirement analysis at Hargreaves Lansdown. 

The Hargreaves Lansdown research shows that a 65-year-old looking for a single-life level annuity with a five-year guarantee can get anything between £6,532 and £7,255 per year depending on which provider they go with. 

Nick Flynn, retirement income director at Canada Life, advises: “Never simply accept the offer from your existing pension company, as you may not always get the best deal. Shopping around for the best deals on car insurance, securing the best mortgage rate or getting a great deal on the high street is now commonplace, and so should be getting the best deal from your hard-earned savings.”

How to shop around

As you approach retirement age, your pension provider will contact you to let you know your options. For example, do you want to withdraw money from your nest egg via income drawdown, buy an annuity, or leave the money where it is for now? Another option is to take the tax-free cash and leave the rest of the pension pot intact.

An annuity is an insurance product that pays a guaranteed income for life in exchange for your pension pot. It’s appealing to some people as it pays a guaranteed amount of money, and there is no risk of running out of money regardless of how long you live.

However, leaving the money invested and using income drawdown is more flexible, and might be better value overall.

Your pension provider may be able to sell the annuity to you, but it’s much better to check annuity rates on the open market first. Like savings rates and mortgage rates, different companies offer different deals.

The decision cannot be reversed, and you will have the annuity for the rest of your life, making it doubly important to do your research before buying one.

Morrissey adds: “An annuity is for life, or at least your life in retirement. Once bought you can’t unwind it, so if you make the wrong decision, you could regret it further down the line.”

The government-backed MoneyHelper service provides a free annuity calculator, which you can use to compare rates.

You can also use a professional adviser or annuity broker who can answer any questions, look at different annuity products and take your health and lifestyle into account.

Flynn notes: “It’s vital to take the time to make an additional step in the [annuity buying] process, and shop around for not only the best rate, but the right shape annuity for your individual circumstances.”

Choosing the right annuity for you 

You may be able to get a bigger annuity - and therefore a higher income from your pension pot – if you provide health and lifestyle information. Some annuity providers use people’s health and lifestyle information to calculate the rates offered, but not all.  

You should ask your pension provider if it is using this information as this could provide a significant increase in retirement income.

The Hargreaves Lansdown data shows that someone disclosing their 10-a-day smoking habit could get up to £7,507 per year from a £100,000 pension pot. This is £252 more than the best standard annuity rate.

Annuities that take into account health factors are called “enhanced” or “impaired”. Morrissey notes that someone with a condition such as diabetes could receive another “several hundred pounds per year” on top.

Morrissey: “Getting the wrong type of annuity can cost you dear. Many people may feel uncomfortable disclosing these details as they think they will be penalised. However, it is vital you put as much information as you can on the form as it could make an enormous difference to the income you receive long term.”

There are other types of annuity on offer. A joint annuity pays an income to a spouse or civil partner when you die. An escalating annuity - also known as index-linked or inflation-linked - pays a lower starting income but then increases each year.

You can also choose to add a guarantee onto the annuity. These tend to vary between five and 30 years. This means that if you die before the guarantee period finishes, your beneficiaries will receive the income for the rest of the period.

About three-quarters of annuities sold come with guarantees attached, typically five or 10 years, according to the FCA.

These will have a higher annual income than those with a longer guarantee period. However, Canada Life analysis shows that choosing a longer period of 20 or 30 years (and a lower annual income) can give pension savers - or their estate - their money back plus a significant return.

Ruth Emery
Contributing editor

Ruth is passionate about helping people feel more confident about their finances. She was previously editor of Times Money Mentor, and prior to that was deputy Money editor at The Sunday Times. 

A multi-award winning journalist, Ruth started her career on a pensions magazine at the FT Group, and has also worked at Money Observer and Money Advice Service. 

Outside of work, she is a mum to two young children, a magistrate and an NHS volunteer.