As Annuity rates show signs of increasing, many would-be retirees might be tempted to delay their Annuity purchase, but new research shows this could prove to be a costly mistake.
Figures from Annuity provider MGM Advantage, show that the lost income resulting from a two year delay in buying an Annuity, could take between 37 and 41 years to recover; well above the remaining life expectancy of the average retiree.
Delaying an Annuity purchase
As gilt yields have started to rise and Annuity rates tick up, more retirees have been tempted to delay the purchase of their Annuity, in the hope of ultimately securing a higher income. However, whilst putting off an Annuity purchase should mean a higher rate, simply because the purchaser is older, the figures from MGM Advantage shows that the overall income received could actually be less.
The research shows that if Annuity rates stay the same as they are today, it would take between 37 and 41 years to recoup the lost income. Furthermore for a retiree to breakeven on the total income they receive, Annuity rates would have to rise by 6% during the period of deferment.
Commenting on the figures, Andrew Tully of MGM Advantage said: “We have seen Annuity rates improve over the first half of the year, from their historic lows in 2012, but the long-term outlook for rates is uncertain. It would take a betting man to take a punt on Annuity rates improving by at least 6% over the next couple of years to make any delay worthwhile. If rates improved by 6% from today, it would be around 19 years into your Annuity being set up for you to break-even on your total income. Many people will want and need to generate an income from their pension now, not be able to afford to wait in the hope that rates will significantly improve.”
Tulley continued: “There are many factors currently affecting Annuity rates. Gilt yields remain low, Quantitative Easing is still in the background, people are generally living longer and the impact of Solvency 2 is yet to be fully felt, so there is no guarantee rates will improve enough for any delay to pay off.”
Advantages of Annuity deferral
Some Annuity experts have criticised the research, pointing out that it takes no account of any growth in the size of the pension fund during the two year period of deferment; of course the reverse could be true and the value of the pension could fall.
There are also other advantages of deferment:
- If the person dies during the period of deferment the entire pension fund would be paid out to his or her beneficiaries as a tax-free lump sum
- During the period of deferment an individual’s health could worsen meaning they qualify for an Enhanced Annuity, which could pay an even higher income.
- Annuity rates could increase by more than 6%; the breakeven point as calculated by MGM Advantage
The MGM figures in full:
Pension Pot £25,000 £50,000 £100,000 £150,000 £200,000
Annual income at age 65 £1,456 £2,962 £5,870 £8,816 £11,767
Annual income at age 67 £1,531 £3,108 £6,192 £9,298 £12,412
Income lost from two year delay £2,912 £5,924 £11,740 £17,632 £23,534
Time taken to recoup lost pension income 39 years @ £75 a year 41 years @ £146 a year 37 years @ £322 a year 37 years @ £482 a year 37 years @ £645 a year
Matching the total income over an average retirement would require an increase in annuity rates at age 67 of: 6% 6% 6% 6% 6%
Alternative retirement income options
For retirees who can’t afford to delay taking an income, but don’t want to lock in to today’s Annuity rates, there are a range of other options which should be considered, including:
- Income Drawdown, now known as Capped Drawdown
- Fixed Term Annuities
- Investment Linked Annuities
- Phased Retirement
- Flexible Drawdown, subject to certain qualifying criteria
Of course every individual retiree’s circumstances are different and advice should be sought from an Independent Financial Adviser (IFA) to confirm the best course of action.
Our team of Independent Financial Advisers in Nottingham are experienced in developing retirement income strategies for clients the length and breadth of the UK. If you are approaching retirement and would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email firstname.lastname@example.org