I meet many people approaching retirement and together we have to decide when is best for them to take benefits from their pension plans. There are a number of different options available – buying an annuity is one of them. Annuity rates are at an all time low so it would be easy to think that delaying buying your annuity for a few years is the better option.
Low annuity rates are a real worry for many people. Annuity rates are unlikely to rise in the near future and in fact they could fall even more:
- More quantitative easing on the cards (which drives down gilt yields which affect annuity rates)
- The EU Gender Pricing initiative – insurance companies will no longer be able to price products differently for men and women. Women tend to live longer than men and therefore receive lower annuity rates. The cynic (realist?) might say that insurance companies will be more likely to drop the rates for men to bring them into line with female rates rather than increasing female rates to be level with male rates.
- Solvency 11 – banks and insurance companies will have to hold more cash and this puts more pressure on these institutions – more pressure = more costs which will be passed onto the consumer.
As an example of how delaying buying your annuity might not be the best option take a look at this:
“Even before all these external changes are taken into account, deferring taking an annuity, even for a couple of years, can have a negative effect on your income in retirement.
Calculations by annuity provider MGM Advantage show a 65-year-old man with a £100,000 pension could buy a yearly income of £5,901 today, while a 67-year-old man with the same pension would receive a better rate of £6,165.
If the younger man delays his pension by two years, with all other factors remaining unchanged, he will have given up two years of income or £11,802.
Although the annual income would increase £264 a year if he delays buying an annuity, it would take him around 44 years to recoup the money lost by deferring for two years. This is over double the 21 years the average 65-year-old male lives in retirement.” – Michelle McGagh
By David Gibson