Consider taking your annuity sooner rather than later

Selecting exactly the right annuity to meet individual needs from the many payment options and providers available can be one of the most important decisions a person has to make.

But buying sooner rather than later may be even more important, says Defaqto, the financial research company.

Not only is there a realistic prospect of the bank base rate being reduced in the coming months, having the effect of bringing annuity rates down with it, buying early will both secure the current rate but also provide an income that would take many years to replace if the annuity is taken later.

A typical open market level annuity for a 65 year old man in good health, without a spouse’s income, guarantee or escalation, with a pension fund of £100,000 currently is £7,410. The same annuity, if taken at 64, would typically be £7,234.

So by delaying his annuity until 65, the man would receive an extra £176 per year for as long as he lived. However, he would have forfeited £7,234 by not taking his annuity at 64, and he would have to survive 41 years to make up the difference.

This assumes that the pension fund remains the same over the time in question. Even if it grew 6% in the year between him being 64 and 65, the resulting break-even period would be 12.2 years.

For a 60 year old woman in good health, a typical open market level annuity without a spouse’s income, guarantee or escalation, with a pension fund of £100,000 is currently £6,323. The same annuity, if taken at 59, would typically be £6,228.

So by delaying her annuity until 60, the woman would receive an extra £95 a year as long as she lived. However, she would have forfeited £6,228 by not taking her annuity at 59 and she would have to survive 65.5 years to make up the difference.

This assumes that the pension fund remains the same over the time in question, Even if it grew 6%, in the year between her being 59 and 60, the resulting break-even period would be 13.8 years.

Matt Ward, Principal Consultant for Wealth and Pensions Management at Defaqto said: “Choosing the right time to take your annuity is very specific to your individual circumstances and to your view on future annuity rates, even if your pension pot is protected by being in money or near money assets. So when you decide to take your annuity is just as important as getting the right annuity from the right provider at the right price.”