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When should I buy an annuity?

  • By Richard Ellis
  • 11 Jun, 2013

Annuities were designed at a time when retirees typically stopped work on a given date and were mostly looking for a predictable amount of income, guaranteed to be paid for life. The problem is that this ideal is becoming more expensive to deliver, at least for younger annuitants.

The changing face of retirement

Annuities were designed at a time when retirees typically stopped work on a given date and were mostly looking for a predictable amount of income, guaranteed to be paid for the annuititant's life.

The problem is that this ideal is becoming more expensive to deliver, at least for younger annuitants.

Delaying annuity purchase doesn't mean you can't access retirement income. You could choose an alternative solution, such as income drawdown, to provide an income in the short to medium term and purchase an annuity later on.

There is no guarantee of course that annuity rates will improve but you will be slightly older which would be in your favour.

Some retirements facts

  • The average life expectancy for a man after age 65 has increased by 75% since the 1950s.
  • Annuity rates have fallen for the fifth consecutive year since 2008.
  • Over this period male annuity rates have fallen by 23%*
  • The real value of income can decrease by nearly 50% over 20 years (assuming 3% inflation).

The case for delaying buying an annuity

Although life expectancy is increasing, many people still expect to retire in their sixties, resulting in longer periods in retirement. The longer people spend in retirement the more likely it is that their financial needs will change. It makes perfect sense to consider if it is right for you to commit to a particular annuity shape until your requirements have stabilised.

Annuity rates have recently shown a slight short term improvement which could continue. It would probably be optimistic to rely on this for a number of reasons including gender equality, improving mortality, the growth of specialist enhanced annuities and imminent changes to EU legislation.  However, of more significance is the fact that if you can afford to wait a few years before annuitising, you will be older and this may result in better rates.

You may benefit from enhanced annuity rates at a later date. It has been estimated that up to 60% of people could qualify for an enhanced annuity. The older you are, the more likely this will apply, and it may be worth waiting until it does.

You may want, or need, to keep working. The Office of National Statistics (ONS) figures show that 12% of men and 11.6% of women are still employed at age 65, mostly in part-time roles. This might enable you to take an initially lower level of pension income, which in turn could preserve pension savings to purchase a higher annuity income later.

You may want to manage your income tax bill. Pension income, whether from an annuity or a drawdown plan, is subject to tax. However the latter allows a choice of exactly how much to withdraw in a given tax year.

You may want to maximise death benefits for family and friends. An annuity can be set up to provide a pension to a spouse or financial dependent, but this comes at the cost of a lower initial income. A drawdown plan can provide a lump sum, subject to 55% tax on crystallised benefits, to anyone nominated. This can be particularly advantageous if you are unmarried or do not have children.

You may want to keep saving, and benefit from the tax relief applicable to savings in a pension plan. Especially as funds can be accessed at any time after age 55 if required.

Given the 20-30 year investment horizon applicable to those with average life expectancy, you may want to continue investing for growth. This is most likely to be appropriate if you have other assets which could replace any losses that may be incurred.

The conventional annuity is still very likely to be the appropriate solution if you want to take the maximum level of guaranteed retirement income. The above factors cannot be ignored and all of your options should be carefully considered before making such an important decision.

If you'd like to discuss income drawdown and your retirement options in more detail,   please contact us to arrange an initial consultation.

* Figures based on a level single life annuity, male life aged 65, guaranteed for 5 years, purchase price £100,000)

Department for Work and Pensions. Cohort estimates of life expectancy April 2011.
Retirement Academy report, Spring 2013.
Just Retirement Limited research, Q3 2012.
ONS: Pension Trends Chapter 4:The labour market and retirement, 2013 edition.

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