Annuity Deferment

Should you consider delaying drawing your retirement income and put off buying that annuity?

Common assumptions about annuity rates

Older age means higher annuity rates

People often assume the longer they wait to purchase their annuity the better the rates may be, because generally speaking annuity rates are higher for older ages (see standard annuity rates for examples). However, this could be a costly assumption.

Future investment returns

Naturally future investment returns or annuity rates can’t be predicted. None of us has a crystal ball, unfortunately. For those that live for a considerable period, delaying buying a retirement income could be advantageous, because the income will be payable for longer. However, poor fund performance, reducing annuity rates, or both, could have a detrimental effect on that income. It’s a difficult issue to judge accurately.

Consider a short term example of deferring buying an annuity

You’ve shopped around for a good annuity rate and have been offered an annuity paying £600 per month (fixed). However, you think that the timing is wrong. You delay your annuity purchase for four months. In that time the value of your pension fund hasn’t changed, and annuity rates are roughly the same. However, by delaying, you’ve lost four months annuity payments of £2400, and you’ll never get that back.

Annuity rates are better the older you are but there is a risk that by delaying the annuity purchase you would not benefit from the income you would have received had you taken the benefits at a younger age.

Factors for consideration

There are risks

As deferring your income has its risks, it is important that all relevant factors are taken into consideration before making your decision. This will include taxation issues, potential penalties that your current provider may impose and your existing investment strategy. Personal issues such as your state of health or that of your spouse also need to be considered. There is no easy answer, and getting it right is not straightforward. There are important factors at play, and various annuity options, such as a joint life annuity, and these must be considered. You must be aware of:

■ prevailing market conditions
■ interest rates
■ mortality changes
■ changing annuity rates

Important footnote

As you can see there are a large number of factors that need to be considered when making your decision, which will have an impact on the income that you will receive for the rest of your life. You should always seek financial advice before purchasing or deferring the purchase of an annuity.