It is estimated that UK consumers miss out on £1bn in pension income each year by failing to shop around for their annuity.

Unlike other insurance products, annuities are a once in a lifetime purchase, so there is no going back once you have bought one.

At present, only a third of people shop around, meaning the majority stick with the annuity on offer from their pension provider, which may not always be the best rate going.

This problem is exacerbated by the fact that almost 40% of consumers do not know what an annuity actually is.

‘Shopping around’ for an annuity has become such a hot issue that a number of comparison sites have emerged this year.

New entrants include Tesco, Confused.com and Buck Consultants. Consumer group Which? is set to launch its service next month.

The Association of British Insurers (ABI) has even got in on the act, publishing sample annuity rates from all its provider members to make it easier for the 400,000 retirees who buy an annuity each year to compare what they are likely to get from different providers and then make a better more informed decision.

The big question for consumers is whether these sites are sufficient, or whether they should seek professional advice when buying arguably the most important financial product of their life.

The general consensus from within the annuity industry is that anything that helps consumers shop around should be welcomed. However, there are concerns that some retirees may fail to understand the repercussions of making a split-decision through comparison sites.

Karen Barrett, chief executive of unbiased.co.uk, says: “Annuity comparison sites are a step in the right direction in helping inform people about the factors they may need to consider when shopping around for an annuity, however these tools simply do not go into enough detail to find the right option for individual circumstances.

“Those using the tools often lack the financial knowledge to confidently choose which annuity is right for them and offers them the best deal. People can browse around and get a rough idea of what income their pension may provide them with if they purchase an annuity, but you simply have not ‘shopped around’ until you have seen an adviser.”

Barrett says that a professional whole of market adviser will have a specialist knowledge of the annuity market, will understand the factors that have the biggest impact on the income offered by a provider, such as health conditions and single or joint life annuities, and will be able to advise on how to utilise the tax free lump sum that can be taken from a pension fund.

Meanwhile, pension expert, Ros Altmann, says comparison sites should be the third step in the annuity buying process.

Before that, she suggests consumers need to –

• Consider if it is the right time to buy an annuity? (Should they perhaps leave the money in the pension fund to hopefully earn more returns and also to ensure it can pass on to their partner tax free as a lump sum if they die before age 75).

For those with other pensions such as a final salary scheme, or for those who keep working, buying an annuity with a small fund to get a few extra pounds a week when they are relatively young in their 60s will not be the best thing to do.

• Decide which type of annuity to buy, if they do want to buy, or whether to choose income drawdown. A broking site may not ensure that they buy the right annuity.

• Know how to find the best rate, but also check that the policy has the right enhancements.

Altmann says that the new entrants into the comparison site space send out the message that it is fine to buy annuities without advice: “That is dangerously misleading. An annuity decision is complex, the timing, the shape can be more important before finding a good rate.”

Critics have also raised concerns over insurers’ ability to manipulate their rankings on comparison sites by watering down non-price terms or by widening exclusion clauses.

There are big differences in results depending on the website used.

Another criticism is that these sites do not sufficiently educate consumers about how annuities work.

For example, there are over 1,500 different medical conditions that mean retirees could get an increased retirement income.

“People who smoke or are taking some kind of prescribed medication could qualify for a type of annuity known as an enhanced or impaired annuity,” says Stephen Lowe, director at specialist annuity provider Just Retirement.

“If you qualify for one of these you could find you receive thousands of pounds more pension income over your retirement than if you bought a standard annuity.”

Of course, not all comparison sites are equal and new entrant, Retirement Assured from Buck Consultants, says it intends to plug the advice gap created since the new adviser fees charging structure came in earlier this year.

Peter Quinton, head of annuity placement at Buck Consultants, says: “Not only is there a growing trend towards researching and buying financial services products online, but, as a result of the Retail Distribution Review, we’ve seen a squeeze on advice, particularly across banks. Consumers are, therefore, increasingly becoming self-directed – and not always by choice – in their personal finance matters.

“However, we believe a complete DIY solution for purchasing annuities is dangerous. Whilst more than three quarters of pre-retirees say they have a basic or good understanding of different annuity types, in reality actual purchases of investment linked, escalating, enhanced and impaired life annuities remain low.”

If you are about to start the search for an annuity, financial adviser Pete Chadborn recommends the following tips:

– Make sure you use an aggregator that gives you more than four providers offering enhanced annuity options for ill-health.

– Consider the merits of taking the tax-free cash.

– Understand the inherent benefits within your existing pension plan. Some older pension plans have built into them a guaranteed annuity rate, some by as much as 8% – so make sure that you double check what you may be entitled to first.

– Prioritise. Look at the small print and work out what guarantees there are in the plan. When speaking to the provider – make sure you get everything in writing so that there is no confusion as to what was said in conversation and what you should actually expect.

– Make sure there isn’t a guaranteed annuity later down the line. For example, someone aged 63 may find that had they waited another two years, they might have been entitled to a guaranteed annuity at a higher rate than if they purchased one at 63. Ask your provider to clarify.

– Consider adding a 10 year guarantee on to your annuity. This costs very little and could mean that if something happens to you during the first decade of your annuity purchase, the provider will still have to pay out to your estate.

– If you are considering building your spouse into your annuity, consider the health of your spouse. This may make uncomfortable conversation, but if your spouse is in ill health and passes away before you, you’ll be stuck paying out for a policy that pays a lower rate.

– If in doubt, always seek professional independent advise. This is unlike buying any other insurance, and one tiny mistake will cost you for the rest of your life.

– Get a second opinion. If you have sought help and want to double check, use a comparison site or another adviser to clarify what you have been advised. Most reputable advisers will not be uncomfortable with scrutiny and this is a very important decision.

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