Retirees lose out on £13,000 by not shopping around for best annuity deal

Retirees are missing out on more than £13,000 by failing to shop around for the best annuity deal. 

According to research by retirement specialist Just Group, the difference between the best and worst annuity rate is £666 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 £13,320 retirement income gap. Over 30 years, the retiree would lose out on a massive £19,980.

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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 39%.

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.

"The gap between the best and worst deals has been rising through this year," comments Stephen Lowe, group communications director at Just Group.

"It’s very unlikely your own pension provider will offer the top rate and settling for a lower amount initially will, over time, multiply into significant sums of lost income."

More than 1,500 annuities were sold every week in 2023/24 but four in 10 (41%) were to retirees buying from their existing pension provider, according to figures released yesterday by the Financial Conduct Authority.

The data from Just Group also shows that the gap between the best and worst annuity rates widens for older pensioners.

The difference between the best and worst deal for a 65-year-old is 11%. This widens to 14% for a 70-year-old and 16% for a 75-year-old. 

The gap could be even bigger once medical history and lifestyle factors are disclosed.

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.

Lowe says: "Annuities provide secure income, giving people peace of mind to spend what they receive without worrying if it will rise, fall or run dry during their lifetime. But there are no second chances when you buy an annuity – you must get it right first time. 

"That means disclosing health and lifestyle information that could push the rate higher, then shopping around to find the most competitive deal. The better the deal, the more lifetime income you get.”

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.

Annuities that take into account health factors are called “enhanced” or “impaired”. Smoking, obesity, asthma, cancer and diabetes are just some of the factors that could increase your annuity payout. 

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, notes: "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.