Is Putting Off Buying An Annuity Really Such A Good Idea?
June 22nd, 2008
If you are nearing retirement, no doubt you will be keeping an eye on the value of your pension fund and the effect the credit crisis is having on it.
If you are looking to buy an annuity, you can do so with your pension fund as soon as you retire, or delay buying your annuity until the stock market recovers to its pre-Credit Crunch levels.
Why delay?
Firstly, the income you get is calculated on your age, so the older you are, the higher your income will be. Secondly, the value of your pension fund may even increase whilst you are delaying, potentially boosting your income when you decide to retire.
For many years annuity rates have been relatively low due to low interest rates and the UK population living longer, which has a detrimental effect on the amount of yearly income you can get from your pension ‘pot’.
You may also have the option of taking an income from any investments you have made over the years, letting your pension potentially grow in value and providing you with a larger income in retirement.
Why buy now?
By buying your annuity now, you could end up benefiting from the Credit Crunch. Many experts believe that now may be the ideal time to buy an annuity, after strong yields from corporate bonds and the partial recovery in stock markets have pushed annuity rates to five-year highs. These higher rates aren’t expected to last, so if you delay buying your annuity, you may get a lower rate than is currently on offer.
Although your pension fund may increase if you decide to delay, and you will get a higher annual income because you are older, you have to consider the years of income you will miss out on and how long it will take to make up that loss.
This table shows that by delaying buying an annuity for five years, it would take over 13 years to make up the income you missed out on. It also highlights the fact that the extra income may not be as much as you think it would be, having waited five years more to get it.
Taking income from your investments is a risky option if it is your only source of income. Your income will change as investment returns fluctuate, so you will never be certain of the amount coming in every month. Don’t forget, an annuity will buy you an income for life – the money in your investments may run out unless performance outstrips the income you take.
You could lose money by putting off buying an annuity, so seek the advice of an expert before you make a decision. Call one of our retirement planning experts on 0800 294 7191.
We can also advise you on the other options available to you when planning for your retirement.
This article appears in our client bulletin, published Summer 2008.
