Far too many people buy the first annuity that comes their way when they are entering retirement. Richard Parkin from Fidelity Worldwide Investment explains to Morningstar's Alanna Petroff how this decision can seriously hurt your finances and haunt you for the rest of your retirement.
Alanna Petroff: Many people save up their whole lives for their retirement, but when it comes to choosing an annuity, they will pick the first thing that comes their way. This is a potentially harmful choice and it could haunt you for the rest of your life. So, joining me now to talk about annuities and choosing the best annuity for you is Richard Parkin, he is a Retirement Specialist from Fidelity Worldwide Investment.
Richard, thanks very much for coming in today.
Richard Parkin: Great to be here.
Petroff: Now, let's talk about choosing an annuity and the benefits of shopping around. First of all, why don't people shop around?
Parkin: I think the main thing is, it is quite daunting to understand all of the options that are available. There is a number of different products out there and people can sometimes feel overwhelmed and will simply take the first thing that comes across their desk.
Petroff: Okay. What's the process of shopping around for an annuity? That's what people should be doing. How do they do it?
Parkin: Okay. So, the first thing -- I mean, the main purpose of shopping around is to try and get a better retirement income than the one that might be being offered to you by your pension provider.
So, the first thing, I think, people need to do is just look at what pots of retirement saving they have got. So, many people will have a number of small pots around the place and there is a huge value of bringing those together. So, it may take a bit of organisation, but that can have a significant impact, because generally the larger the amount that you use to buy an annuity, the better rate that you will get on that annuity.
So, having worked out where the money is coming from, it's then a case of doing a bit of research, and there are a number of websites and places you can go to for help. One in particular is Money Advice Service, where there are a number of guides that will show you how to go about the shopping-around process.
Petroff: Okay. And the Money Advice Service, that's a government website. Correct?
Parkin: Yeah. Money Advice Service is a government funded body that supports people in making financial decisions at any points in their life, but they have got a particular focus on some of the decisions at retirement.
Petroff: What would you say are the main mistakes that people make when they are looking to get an annuity, other than not shopping around, from there?
Parkin: Sure. One of the things that people do get really nervous about is disclosing medical conditions, and I think that comes partly from an embarrassment perhaps sometimes, but also from being told that if you tell an insurance company that you are sick, then you'll end up paying higher premiums. With annuities, it works the other way around. So, if you do have any medical conditions, or if you smoke, or there is anything that might lead the insurance company to think that you may not live as long as some other people, then that can often mean that they'll pay you a higher level of income. So, I think the key thing is to be absolutely honest with the medical conditions you've got, because even the smallest thing can make some difference to your income level.
Petroff: So, the more medical conditions you have and a report, potentially the higher income you could get.
Parkin: That's right. Yeah.
Petroff: Nice. Should you pick up smoking at age 63?
Parkin: Definitely not. I wouldn't recommend that.
Parkin: Probably -- certainly be honest about those things that you have got.
Petroff: Okay. And any other key mistakes that people might make in this area?
Parkin: Yeah. I think people perhaps need to think very carefully about what their income needs are. So, particularly if they might have loved ones, spouses, that they need income to continue till after their death, then they should look at taking an option which would have that happen. There is also the option of having increasing income. Now, for many people the cost of that is they start at a lower level, and for some people that’s too high cost to pay, but you should look at all of the options and just have a think about what's important to you.
Petroff: What would you say is a key tip that you would give to someone as they are about to retire, as they are looking at annuities… what's the one thing you'd want to tell them?
Parkin: Yeah. I think is to plan ahead and do plenty of research. There is an increasing amount of support available on the web and from other sources, as I have said. But they needn’t go for full blown advice, but often many people find it is useful to talk to a retirement specialist, if not to get full blown advice, but to get some guidance. Many people find that with a bit of help and a conversation with people that they can very quickly get to the product they need.
Petroff: Okay. Thanks very much for coming in.
Parkin: Thank you.
Petroff: That was Richard Parkin from Fidelity Worldwide Investment. I'm Alanna Petroff. Thank you for watching Morningstar.