Annuities: Why delaying your purchase could take 40 years to make up

Following the pension changes announced in the Budget many people have put off buying an Annuity.

Some people have delayed because they plan to take advantage of the more flexible rules to be introduced from April 2015. Whilst others will be hopeful that new products are launched, which might offer a better solution.

Undoubtedly though, some people who initially delay will end up buying an Annuity. Perhaps because a better option doesn’t materialise, the Annuity rate offered looks attractive compared to other options or simply because they want the guaranteed income offered by the Annuity.

However, new research has shown just how costly a delay in the purchase of an Annuity could be. The figures, produced by MGM Advantage, reveal:

• If all things remain equal, it would take around 40 years, far longer than the average remaining life expectancy, for the income ‘lost’ by a two-year delay to be made up
• Even if Annuity rates were to improve by 5% during the delay, the pension pot grew by a similar amount and your health worsened, it would still take eight years to make up the ‘lost’ income

Commenting on the research Andrew Tully, Pensions Technical Director, MGM Advantage said: “These figures demonstrate that there are scenarios where it might be worthwhile delaying making a decision until after April 2015. But if people want some level of sustainable income, they need to be aware that they are taking a big gamble that a number of things work in their favour. As the numbers show if everything remains unchanged it would take 40 years to recoup the ‘missed’ income. That’s a lot longer than the average person expects to live at age 65.” (Source: MGM Advantage)

Advantages of delaying your Annuity purchase

Whilst it may take a significant period of time to make up the ‘lost’ income, there are benefits to delaying your Annuity purchase:

• Annuity rates could rise
• Your health could deteriorate, allowing you to qualify for an Enhanced Annuity
• The value of your pension pot could rise, although in reality most people will have moved to safer, Cash style investments, which are unlikely to grow significantly
• If you die before the age of 75, without having taken an income, or the tax-free lump sum, the entire pension pot will be paid out tax-free to your beneficiaries
• Other potentially more suitable products might be launched whilst you defer

Disadvantages of delaying your Annuity purchase

There are risks and potential disadvantages to delaying your decision to purchase an Annuity; many are of course direct opposites of the advantages we’ve already mentioned:

• Annuity rates could fall
• As the research from MGM Advantage has shown, it can take a significant amount of time to make up the income ‘lost’ by delaying your Annuity purchase
• The value of your pension pot could fall, especially if you remain invested in assets such as Stocks and Shares
• New products may not be launched, or if they are, they may be unsuitable
• There are occasions when it is beneficial to defer your State Pension and take income from your private or workplace Pension as an alternative

Income now without the need to purchase an Annuity

Postponing your Annuity purchase will delay the date on which your pension income starts.
For some people with savings, additional income or who decide to carry on working, this might not be a problem.

However, other people will face a dilemma: needing the income, but really wanting to defer a decision whether or not to buy an Annuity. This might sound impossible to achieve, but there are options, for example:

• Income Drawdown
• A Fixed Term Annuity
• Using some or all of the tax-free lump sum to meet expenditure until a decision whether or not to buy an Annuity can be taken

The right option will depend on your own individual circumstances, which is why getting the right advice is crucial.

We’re here to help

If you are approaching retirement, thinking about buying an Annuity or simply confused by the new rules, we’re here to help.
Our highly qualified and experienced advisers will be able to guide you through the various options, to recommend a bespoke solution designed for your needs.

Call one of our team today on 0115 933 8433, complete the online enquire form by clicking here, or email info@investmentsense.co.uk