Should You Delay Buying an Annuity? 

This is the question we are asked quite frequently - "should I buy my Annuity now?". Whilst we can't predict the future, what we can do is to analyse the figures so you can make an informed decision. You can also download an example to read at your leisure here - Cost of Delaying a Pension Annuity

The markets have fallen since the highs back in 2007, slashing the value of many unit linked pension funds; with profit providers may be imposing market value reductions once more. Markets have recovered a little since March 2008 so now might be a good time to evealuate your options.

Clearly, we need to discuss this with you on an individual basis

March 2009 - January 2011

Monthly gross payments for a male, 65, non-smoker, single life annuity, 10 year guarantee. Purchase price £120,000

This is quite complex, but a number of factors have combined to bring this situation about.

We are all living longer. A few years ago an annuity taken out by a 65 year old man at retirement may have only been paid for 5 years before he died. Now, his life expectancy is probably 15 years more than it was then.

Interest rates and inflation rates have fallen. These affect gilt rates which forms the basis on which annuity income is backed. A 10% annuity was quite feasible when interest rates were 8% and inflation 7%, but this is not the case now.

There is an element of “cross subsidy” with annuities. In short, those who die young benefit those who survive. With the advent of Unsecured Pension, this subsidy is likely to decrease as fewer people buy annuities. Unsecured Pension is not available to or suitable for everyone, so an annuity may still be your best choice.

Let us look at an example for a man aged 60 (we shall call him Ron)  who had £100,000 in his fund and was looking forward to a 6% annuity rate, or in other words, an income of £500 per month. He is shocked to find that now his fund is only worth £80,000, so Ron thinks he will wait until it recovers so he doesn't lose £20,000.

A reasonable reaction perhaps, but this means that the fund has to grow by 25% for the £80,000 to be worth £100,000. How long will that take?

If we took a reasonable assumption of 7% per annum growth, it would take just over 3 years for the fund to be worth around £100,000. There is every expectation that annuity rates will have fallen in three years, but we will assume he can get the same rate as today (6%) as Ron is also 3 years older.

Ron now draws £500 per month. His £100,000 does not exist any more - he has exchanged it for an income. What he has forgotten is that he could have been drawing £400 a month for the last three years, amounting to £14,400. If we analyse how long it would take him to re-coup this lost money, we can see that Ron would have to wait for 17 years before he would be better off, by which time he would be 77.

Click the chart to see an enlarged image

The above should not be taken as a recommendation, but should give food for thought and yet another reason to ask for our advice. If you delay buying your Annuity, you could be much worse off overall.

With low interest rates in the UK and the population living ever longer, annuity rates will reduce over the next few years, although recently rates have stabilised and even increased slightly

In addition, the more people who defer annuity purchase in favour of Unsecured Pension (for funds> £100,000) then the "cross subsidy" available to annuity funds diminishes, further depressing rates.