Could it pay to delay your annuity purchase?

With the continuing downward pressure on annuity rates, MGM Advantage, the retirement income specialist, has looked at whether it pays to delay your annuity purchase in the hope you might receive a better income a year or two later.

Annuity rates have been in freefall for a prolonged period of time, driven largely by falling gilt yields, or the returns insurers receive from investing in Government debt.  As the chart shows, annuity rates and gilt yields have been on a pretty continual downward spiral.  The pressures on annuity rates have not gone away, with the full impact of the EU Gender Directive and Solvency II yet to be priced into rates.  And the latest round of quantitative easing will only ‘help' to keep rates low over the short and medium term.

So where does that leave you if you're looking to retire in the near future, and would it pay to delay your annuity purchase if you can afford to?  Well, accordingly to calculations from MGM, almost certainly not.

Take for example a 65 year old man with a £100,000 pension.  That pension could buy a yearly income of £5,901 today.  A 67 year old man with the same pension could get a better income of £6,165.  If the younger man delayed taking his pension by two years, with all other factors remaining unchanged, he will have given up two years income, or put another way £11,802.  His annual income would obviously have increased by £264 a year but it would take him around 44 years to recoup the money he ‘lost' by deferring for two years.  The average life expectancy of a man aged 65 is 21 years in retirement.  And this calculation is before you consider the impact of further falls in annuity rates.

Andrew Tully, Pensions Technical Director, MGM Advantage said: "With annuity rates at an all time low it could be very tempting to delay your purchase if you can afford to in the hope rates will recover.  But all the signs indicate annuity rates will remain low in the short term - you would need a significant increase in rates, or a change in your circumstances like ill health, to make the wait worthwhile.

"With a huge choice of retirement options available, including investment linked-annuities for those who wish to take on some investment risk as a hedge against inflation, a financial adviser can help you maximise your retirement income.  Shopping around for the best deal is crucial as simply accepting the rate offered by your pension provider could potentially leave you short changed by as much as 46% of your income. It could be the difference between a retirement worth working for and one where you struggle to make ends meet.  It really is that simple."