Defer Buying An Annuity Now and You Could Pay Later!
Those of you approaching retirement may think it prudent to defer buying an annuity. As a result of low interest rates and increased life expectancy, annuity rates have suffered. Many think that by deferring for a while annuity rates will steadily increase and so provide you with a better return. The illustration below shows that this isn’t always the case.
Effects of deferring an annuity from age 65 to 66 (Fund value £100,000 at age 65)
Age of client
66
67
68
^
77
78
79
At year end
1
2
3
^
12
13
14
Cumulative annuity received
Starting at age 65
£8,025
£16,050
£25,075
^
£96,301
£104,327
£112,352
Cumulative annuity received
Starting at age 66
£0
£8,692
£17,385
^
£95,616
£104,308
£113,000
Annuity difference
-£8,025
-£7,358
-£6,690
^
-£685
-£19
+£648
This man defers his annuity by just one year — until age 66 — assuming the fund value has increased and based on the annuity payable to a 66 year old, the annual income from the annuity will increase to £8,692 (based on current annuity rates).
However, it would take you around 13 years to make up the lost income.
Note; If you die, benefits to your estate may be higher as a result of deferral.
Investment risk
If you leave funds invested in the stock market your money could remain at risk from significant falls in the market
If you leave funds invested in cash for safety they are not likely to see significant growth, particularly once you allow for inflation.
If you leave funds invested in With Profits beyond your Normal Retiring Date they may be subject to a Market Value Adjustment when you do retire
Annuity risk
Increases in life expectancy as you get older could result in improved mortality rates and as a consequence relatively poorer income.
If your condition were to worsen you may qualify for a higher annuity but if your condition were to improve you may only qualify for a lower rate.
Your health deteriorates, qualifying you for a higher level of annuity.
Strong fund performance could give you more in your fund which would increase tax-free cash and give a higher annuity whole fund may be available as cash to your dependants or estate.
Your annuity has been purchased later meaning that the guarantee period will finish later and thus your estate may receive more benefit if you die.
Deferring may enable you to take advantage of the increased flexibility offered by the Pensions Simplification rules.
The disadvantages of deferring
Annuity rates could get worse if:
Bond yields reduce.
Insurers price for improving longevity (life expectancy).
Poor fund performance could give you less in your fund, resulting in less tax-free cash and a lower annuity.
You will not have access to tax-free cash until you start to draw benefits.
You will need to have sufficient income from other sources to support yourself (you may have to continue working).
Deferring may result in your total benefits being restricted by the new Pensions Simplification rules.
