With Annuity rates falling and stock markets volatile many people are asking us whether they should delay buying an Annuity in the hope that markets may rise and Annuity rates get better.
Any pension Annuity calculator will show you the current Annuity rate applicable to your circumstances, however is there a case for deferring in the hope that rates will rise?
We thought we would take a look at some of the reasons for and against deferring your Annuity purchase.
1. Can you afford to forgo this income?
If you can continue to work or even live off other assets you may be able to do without your pension for some time to come, however, do you want to continue working or spend other capital which you may have ear marked for something else.
2. How long are you prepared to forgo your Annuity income?
You need to look at how long your alternative source of income can last and whether the investments you use to provide this income are suffering equally from stock market volatility.
3. How certain are you that markets will recover and not fall further?
World stock markets are increasingly volatile with events far out of most people’s control affecting the way the prices of stocks and shares move on a daily basis.
Markets can also take a significant time to recover, for example the FTSE 100 peaked at 6,930 in December 1999, and it failed to hit this level again, with the latest peak being 6,752 in June 2007, before the affects of the credit crunch had become apparent.
4. Do you think Annuity rates will rise in the future?
Annuity rates have fallen in recent years, mainly due to increased longevity, however they are now falling due lower gilt yields. Further downward pressure on Annuity rates may also come from Solvency II which will increase the amount of money insurers have to keep in their reserves and also the European Court of Justice ruling on gender discrimination.
1. Annuity rates could get better
It is possible that Annuity rates could improve if interest rates or gilt yields rise, if overall life expectancy decreases, or your health worsens and you qualify for an Enhanced Annuity.
2. Markets and fund values could rise
Bull and bear markets come and go, and if you defer for long enough it would be hoped that the value of your fund will rise. However, this is clearly not guaranteed and you also have that tricky decision when to buy the Annuity, effective market timing can be extremely hard.
3. Death benefits
If providing a lump sum to your dependants on your death is important to you, then not taking your pension could mean that more money is available to them in the form of a tax free lump sum, than if you had bought an Annuity.
4. You may qualify for an Enhanced Annuity
It is generally accepted that the older you get the more likely you are to become ill. Deferring your Annuity may mean that you suffer from an illness which qualifies you for an Enhanced Annuity and therefore a better rate. Of course you could live the rest of your life with no ailments whatsoever.
Cost of delay – an example
The following example shows the effect of deferring an Annuity purchase by one year, from age 65 to 66. It assumes that the fund is £50,000 at age 65 and, if left invested, will grow by 7% per year after charges and that the individual buys a standard Annuity, on a level basis.
|Today||One year later|
|Annuity purchase at age 65||Annuity purchase at age 66|
|Age||Annual income||Total income received||Annual income||Total income received||Difference in|
The example shows that if you defer now, at age 65, for just one year, it could be 13 years before you get your money back, which also assumes of course that the fund actually rises in the year it remains invested.
The decision whether or not to delay can be a difficult one, with many different considerations to take into account. Recent falls in Annuity rates and volatility on the stock markets the timing has become ever harder.