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How do you buy an Annuity?

Buying an Annuity can be a daunting task.

Who is going to offer me the best rate? What type of Annuity should I buy? Should I link it to inflation? Do I qualify for an Enhanced Annuity? How do I find an adviser I can trust?

These are just some of the many questions that you will want answering. There will probably be others too.

So just what is the process for buying an Annuity? You could, of course, do it yourself, but we thought we’d take a look at what will typically happen if you ask an independent adviser for advice.

Stage 1: Initial contact with your adviser

You may have found an IFA you trust through a recommendation or some other means. Alternatively you may be talking to a couple of advisers to see who comes up with the best quote. Either way, the process is similar.

Your IFA will want to have an initial conversation or meeting with you to discuss your requirements. They will cover your plans for retirement; discuss with you the various retirement options to confirm that an Annuity is indeed the best option for you; and also find out a little more about your existing pensions.

You should expect your IFA to talk you through all the retirement options. There are about 10 in total. Beware of an adviser pushing you down one route and not considering alternative options.

Your adviser should also talk to you about the advantages and disadvantages of moving your existing pension into a cash fund to prevent it from being affected from falls in the stock market.

Stage 2: Quotes and confirmation of your existing scheme

Your IFA will explain to you the different options. For example, should you have a level Annuity? Should you include a spouse’s pension? Once these things have been agreed your IFA will start working shopping around for the best quote. If you are not sure what options you would like to be included, then ask them to get more than one quote for you.

Getting the best quote may involve finding out whether you qualify for an Enhanced Annuity due to health or lifestyle issues. If the adviser thinks you may qualify, he or she will spend some time asking you a series of medical questions. The answers will be provided in confidence to the Annuity providers who will confirm whether or not you qualify for enhanced terms.

At this stage your IFA should also contact your existing pension providers to confirm the information you have given. It is important that your IFA checks whether your existing plan has guaranteed Annuity rates or perhaps penalties on transfer. To make these checks, the IFA will need your written permission.

Stage 3: Agree which Annuity you will buy

Your IFA will show you the best quotes he or she has been able to source. If you thought you would qualify for an enhanced rate, but don’t, then ask why.

If you have asked for more than one quote, consider the benefit of the different options compared to the level of income provided.

It’s possible that the quote will be from an Annuity provider you have not heard of. If you are unsure of who the provider is, or concerned about their financial strength, ask your IFA to provide you with more information.

Ask your IFA to confirm with the providers that the terms offered are the very best that they can achieve. Many Annuity providers, especially for larger cases, will negotiate better rates to win your business.

Once you have seen all the quotes, you should be in a position to make a decision. If you are unsure, then ask your IFA to advise you.

Stage 4: Application forms

Once you have decided on the best Annuity provider, it’s time to start the paperwork.

Your IFA may prefer to do the paperwork at a face to face meeting, or they may send it to you with instructions on how to complete it. Either way, there can be a lot of forms to complete, and it’s important that it’s done correctly.

At this stage your IFA may need other supporting documents for identification checks. If you are applying for a spouse’s pension, your marriage certificate is likely to be needed.

Stage 6: Transfer of existing funds and payment of tax free cash

Once the application forms are completed, they will be submitted to the Annuity provider who will contact your existing scheme or schemes to transfer the funds.

You can expect regular updates from your IFA on the progress of your application.

You can usually choose whether the tax free lump sum is paid by your existing scheme or the Annuity provider.

Summary

When buying an Annuity there are a number of golden rules that you should follow:

  1. Take independent advice
  2. Get the adviser to talk you through all your retirement income options, as there may be a better route than an Annuity
  3. Shop around for the best products and the best rates
  4. Always consider whether you qualify for an Enhanced Annuity
  5. Get your IFA to negotiate with the Annuity providers - you only get one shot at this!
  6. Think about switching your existing fund away from stocks and shares to safer assets whilst you arrange your Annuity. A stock market crash is not welcome at the best of times, let alone when you are just about to buy your Annuity

Finally, a word on timing.

It is hard to put an exact timescale on the whole process as much depends on how long it takes to decide which retirement option you will follow. However, as a rule of thumb, once you have submitted an application it usually takes between two and four weeks to complete. Make sure you leave yourself enough time to consider all your options and have the Annuity completed in time for your retirement.