PEOPLE reaching retirement age might be missing out on hundreds of pounds a year in income by not shopping around for a pension provider.

Not realising you can shop around for a pension deal is one of the most common mistakes people make- and it can cost you thousands over the course of your retirement.

A common route people take at retirement is to buy an annuity – this is where you swap your pension savings pot for a guaranteed income for life.

But how much you get can vary vastly between providers.

Like many things in life, shopping around and comparing deals is important to make sure you get the best deal.

But insurance provider Canada Life found that many people can't be bothered with the hassle of switching, unless there's a serious amount of money in it for them.

Customers who are already planning to shop around for their annuity are more likely to accept an extra income of £350 a year to swap providers.

These savers could be missing out on hundreds of pounds every year, which can add up to thousands over a 20- or 30-year retirement.

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Why you should shop around for an annuity

An annuity is a type of retirement product you purchase with the money from your pension pot.

It pays you a guaranteed income for life.

When you purchase an annuity, you can opt to take 25% of your pension pot as a tax-free lump sum to help you pay immediate costs such as bills, or to help you move home.

The remainder is then converted into a lifetime income.

But you only get one chance to buy an annuity, so you need to get it right first time.

The amount of money provided by an annuity will depend on factors such as the size of your pension pot, your age, health and lifestyle details, and also annuity rates at the time.

In order to get the best value, you need to shop around as your current pension provider might not offer the most for your money.

Nick Flynn, director of retirement income at Canada Life said: “For those who choose to shop around for their annuity it can be easy to secure an extra £500 a year, or even more.”

He said that simple changes such as disclosing all your lifestyle and medical information could get you an extra boost to your annuity income too.

If you managed to get an extra £500 a year, that would amount to £10,000 over a 20-year retirement.

“Quite simply this is ‘free’ money,” he added.

He recommended never accepting the first offer from your current pension provider, and considering talking to a financial adviser to get help.

Here are five things to do before you buy an annuity.

What are the different types of pension?

WE round-up the main types of pension and how they differ:

  • Personal pension or self-invested personal pension (Sipp) – This is probably the most flexible type of pension as you can choose your own provider and how much you invest.
  • Workplace pension – The Government has made it so it's compulsory for employers to automatically enrol you in your workplace pension, unless you choose to opt out.
    These so-called defined contribution (DC) pensions are usually chosen by your employer and you won't be able to change it. Minimum contributions rose to 8% in April 2019, with employees now paying in 5% (1% in tax relief) and employers contributing 3%.
  • Final salary pension – This is a also a workplace pension but here, what you get in retirement is decided based on your salary, and you'll be paid a set amount each year on retiring. It's often referred to as a gold-plated pension or a defined benefit (DB) pension. But they're not typically offered by employers anymore.
  • New state pension – This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £179.60 a week and you'll need 35 years of national insurance contributions to get this. You also need at least ten years' worth of national insurance contributions to qualify.
  • Basic state pension – If you reached the state pension age on or before April 2016, you'll get the basic state pension. The full amount is £137.65 per week and you'll need 30 years of national insurance contributions to get this. If you have the basic state pension you may also get a top-up from what's known as the additional or second state pension. Those who have built up national insurance contributions under both the basic and new state pensions will get a combination of both schemes.

Decide whether an annuity is right for you

You have the freedom to choose how you use your pension pot based on your financial needs.

You will want to think about your lifestyle, family, how long you expect to live, and any other income when making a decision.

There are a few options you can choose from:

  • do nothing, and leave your money invested in your pension scheme
  • withdraw some or all of your pension pot as a cash lump sum
  • buy an annuity
  • invest part or all of your pension into the stock market, known as income drawdown
  • a mix of these options, depending on the size of your pension pot

Each option comes with its own set of rules, fees and taxes.

There is no rush to make a decision, so take your time and consider getting proper financial advice.

Check the open market

The open market simply means shopping around pension providers to find the best deal for your needs.

According to the Financial Conduct Authority, there were 20 pension firms which sold annuities last year, but only a handful competed for business in the open market.

At the moment there are six open market providers: Aviva, Canada Life, Just, Legal & General, LV= and Scottish Widows.

Using the open market providers could enable you to get a better rate than your current provider offers.

Using a comparison tool such as Money Helper can help you search these providers to find you a good deal.

Work out what sort of income you need

You can either opt for a guaranteed income for life, called a lifetime annuity, which provides a regular income in return for a lump sum, with the guarantee that the money won't run out before you die.

Or you can opt for a guaranteed income for a fixed term, known as a fixed term annuity, which will give you a guaranteed income for a set number of years with an option to get money back at the end of the term.

This could be useful if you think you might want to access more of your pension pot sooner, or if you want to purchase another retirement product later.

Other annuities are linked to inflation so your income keeps up with the cost of living.

Research suggests that Brits need £305,000 in their pension pot for a comfortable retirement.

Declare any medical conditions

With most financial products, you get penalised for being in poor health and have to pay higher premiums or get offered a worse deal.

But with annuities, a medical condition such as cancer or diabetes can work in your favour and could boost the amount of income you receive.

These types of annuities are called enhanced, or impaired, annuities.

Enhanced annuities work on the basis that if you have a medical condition, you'll have a shorter life expectancy than someone in a better state of health.

That means annuity companies see you as someone that they'll have to pay for less time so compensate for that by giving you a higher income – essentially using up your pension fund more quickly by giving you access to more money each year.

Think about who might benefit when you die

If you want your spouse to benefit after you're gone, you can buy something called a joint-life annuity, which means your husband or wife will keep getting money after you die.

What happens to your partners pension when they die depends on what sort of pension they have.

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