Buy now and pay later – When should you buy an Annuity?

Posted on November 29th, 2010 | Categories - Pensions

We are often asked by clients when should they commit to buying an Annuity.

If you are approaching retirement or thinking that it may be time to stop working sometime soon then it’s important not to underestimate the timing of this crucial purchase. We thought we’d take a look at some of the reasons why you might by your Annuity now and also some possible reasons why you may want to delay the purchase.

Buy an Annuity now

1. You need the income the Annuity will provide; it really doesn’t get much simpler than that and this is the main reason for not delaying. If you want to retire now and can’t without replacing the income you are unlikely to have any other choice than to proceed with a purchase.

2. If you think Annuity rates will fall in the future then you may decide to purchase your Annuity now to avoid suffering from lower rates at a later date.

3. The value of your pension fund may have increased this year, recouping losses from previous years; you may therefore think that now is the right time to convert the pension fund into an Annuity.

4. Any delay in buying an Annuity can be very costly. Whilst the Annuity rate may rise because you are older and you may have a larger fund with which to buy an Annuity, if you get positive growth both of these factors may be outweighed by the months or years when you have not had an income.

A delay of say one year on a typical pension fund of £100,000 would cost £6,054 (based on a 65 year old male, with a 63 year old spouse, on a level basis with a 10 year guarantee and a 50% spouses pension, source: The Exchange). This income would need to be compensated for via a higher Annuity or larger pension fund – is this likely to be possible?

Delay purchasing an annuity

Whilst you may wish to delay the purchase of a Lifetime Annuity you should always bear in mind that there are a number of options which are available which will still allow you to take an income without committing to a Lifetime Annuity right now. These include a Fixed Term Annuity and an Income Drawdown.

Some possible reasons to delay the purchase of an Annuity include:

1. You think Annuity rates will rise and therefore you wish to delay the purchase of the Annuity.

2. You believe that you may qualify for an Enhanced Annuity in the future and therefore get a better Annuity rate. Your illness or medical condition may not qualify for an Enhanced Annuity now but if it gets worse then you may do; this can be a reason for delaying the decision to purchase.

3. Whilst stock markets have had a good year during 2010, you still may not have recouped all your loses from previous year’s bear markets; you may therefore prefer to delay purchasing an Annuity until the value of your fund has risen further. However, it’s worth remembering that there is no guarantee that this will happen.

4. You want to wait until you are older so you can benefit from a better Annuity rate but of course in the meantime Annuity rates could also have fallen. As you can see, there are many reasons to buy your Annuity as soon as you need the income and other reasons to delay, which don’t have to stop you receiving an income from your pension now.

We would always recommend that you start by taking advice, use our Annuity Calculator, which can be found here, or call us today on 0115 933 8433 to speak to one of our retirement specialists who can guide you through this complex area.