Here's a simple way to increase your retirement pay without parting with any extra cash.
Hands up if you know what an annuity is? If you answered something along the lines of "an income which is paid until you die, bought using a pension pot or other lump sum", then give yourself a pat on the back!
In return for handing over a lump sum, a life insurer will guarantee to pay you a monthly or annual income for the rest of your natural life, which is known as an annuity. Although the vast majority of annuities are bought by pensioners, people of any age can buy one. However, the younger you are, the longer your life expectancy, and, therefore, the lower your annuity rate. Conversely, the older you are, the higher your annuity rate, and the more income your lump sum buys.
As an annuity is essentially a gamble on how long you live, life insurers rely on mortality tables to take a stab at your life expectancy. Being naturally prudent organisations, they err on the side of caution. Hence, in order to play the annuity game to maximum advantage, you need to live a lot longer than a firm's actuaries expect you to!
Now for some bad news: when you die, the life insurance company keeps your lump sum, lock, stock and barrel. Even worse, over the past decade, annuity returns have fallen in line with long-term interest rates. This means that the income which they pay is much lower than it was in the mid-Nineties. Indeed, as I warned here, annuity rates have fallen by around two-fifths (40%) since mid-1996, which explains why many investors have abandoned annuities and opted instead for an alternative known as unsecured income.
One way to improve your returns from annuities is to exercise what's known as your 'open market option'. In short, this means that you don't need to buy your annuity from your existing pension provider, and are free to shop around for the best deal that the entire market offers.
Of course, if you were searching for a guaranteed monthly (or annual) income for life, you'd be sure to find the best deal, right? Wrong! Amazingly, only about four in ten people (40%) bother to take advantage of their legal right to exercise the open-market option, which means that they have short-changed themselves for the rest of their lives. As Homer Simpson would say, "D'oh!"
What's more, if you have a life-limiting illness or medical condition, some firms will offer you a much higher annuity rate in recognition of your shortened life expectancy. Even smokers and diabetics can benefit from what are known as enhanced, or life-impaired annuities, so be sure to mention any adverse medical history in your application. Leading companies in this field include GE Life, Just Retirement, Prudential and Reliance Mutual.
Thus, if you have a private or Stakeholder pension, company or free-standing Additional Voluntary Contributions, or plan to withdraw tax-free cash from a pension to be used to buy an annuity, then it is absolutely vital that you shop around for the highest annuity income available. In order to do this, it is best to employ the services of a specialist annuity broker which will search the entire market for you, such as Annuity Direct, Chartwell, Hargreaves Lansdown or The Annuity Bureau. In most cases, these companies will improve your retirement income by 10% to 15%, although enhancements of 30% to 40% are possible.
Finally, if you'd like to tackle your retirement planning while you still have plenty of time to make a difference, try reading Ten Ways To Pump Up Your Pension and Perking Up Past Pensions. Here's to a prosperous life after work!
More: Learn more about Retirement and Pensions.