BLOG: Three retirement tips

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As final salary pensions are increasingly consigned to the history books, more and more of us retire with defined contribution pension savings.

We also have to face the often daunting task of working out how to ensure we buy the right product at retirement.

For most people this means buying an annuity. The key benefit of an annuity is that it will guarantee you a pension income for the rest of your life.

So you have peace of mind knowing that you’ll have an income even if you live well into your nineties or beyond. However, buying an annuity requires careful consideration because it is a once-in-a-lifetime decision that can’t be reviewed if you change your mind afterwards.

Here are three key tips for people to follow when it comes to making this important decision:

Understand your options

You should think about the shape of annuity that’s right for your circumstances. As well as your own retirement needs, it’s important to think about the financial needs of your spouse or other dependents you may have. A joint life annuity will provide an income to a spouse or dependent who outlives you. Annuities can also increase in payment each year to help keep pace with the effects of inflation. However, both of these options are likely to mean you get a lower income at outset so you will need to weigh up the pros and cons carefully.

There are alternatives to annuities, which may be more suitable for you. If you’re interested in alternatives you should consult a financial adviser to help you evaluate whether they are the right solutions for you.

Consider an enhanced annuity

Enhanced annuities offer a higher pension income to people with medical conditions or certain lifestyle characteristics. They have become increasingly common in the last five years and it is now possible to get a higher income simply because you used to smoke or drink a little more than you really should. In our experience, about three quarters of our customers can qualify for some level of enhancement to their annuity, so it is well worth investigating this option.

Shop around

My third important tip for anybody approaching retirement is to shop around the market to ensure you get a competitive rate. The annuity market has become very specialised and you should not assume that a company that has good rates for certain people will be just as good for others. Not realising that you could qualify for an enhanced annuity can be an expensive mistake that you live to regret throughout retirement. Your personal circumstances will determine which company is able to offer you the best annuity rate.

Finally, if you’re thinking of taking your annuity from your existing pension provider make sure you shop around before you commit to ensure you’re satisfied that they are offering you a competitive rate and to investigate whether you can qualify for an enhancement elsewhere.

David Still is managing director of retirement income at Friends Life

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