Real cost of annuity purchase delay revealed

If you delay your annuity purchase by two years in the hope annuity rates will rise, it could take you up to 41 years to recoup the income lost from those first two years, according to MGM Advantage.

While by delaying your annuity purchase you will receive a higher income because of your age, the time it would take to recoup those two years' income is around double the average life expectancy for men and women aged 65.
For example, a £100,000 pension pot would give a 65-year-old an annual income of £5,870, but increases to £6,192 at the age of 67. However, the cost of delay is £11,740 and the time taken to make good the shortfall is 37 years at a rate of £322 a year.

Matching the total income over an average retirement would require an increase in annuity rates at age 67 of 6%, said MGM Advantage.

Andrew Tully, pensions technical director at MGM Advantage, said: "We have seen annuity rates improve over the first half of the year, from their historic lows in 2012, but the long-term outlook for rates is uncertain.

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"It would take a betting man to take a punt on annuity rates improving by at least 6% over the next couple of years to make any delay worthwhile. If rates improved by 6% from today, it would be around 19 years into your annuity being set up for you to break-even on your total income. Many people will want and need to generate an income from their pension now, not be able to afford to wait in the hope that rates will significantly improve."
The table below shows the impact of delaying your annuity purchase and the time period to make good that shortfall if rates remain at the same level as today.

Cost of delay

Pension Pot £25,000 £50,000 £100,000 £150,000 £200,000
Annual income at age 65 £1,456 £2,962 £5,870 £8,816 £11,767
Annual income at age 67 £1,531 £3,108 £6,192 £9,298 £12,412
Income lost from two-year delay £2,912 £5,924 £11,740 £17,632 £23,534
Time taken to recoup lost pension income 39 years at £75 a year 41 years at £146 a year 37 years at £322 a year 37 years at £482 a year 37 years at £645 a year
Matching the total income over an average retirement would require an increase in annuity rates at age 67 of: 6% 6% 6% 6% 6%


Your Comments

I regret to comment that you are doing readers/subscribers a disservervice by not offering balanced advice in the article re the cost of delaying an annuity purchase.
The article would have had more credibility if you had added the advice that by not delaying an annuity purchase there is the attendant risk that should death occur at any point following the purchase, the annuity company walks away with the entire annuity fund.
Yes, there are ways that can ameliorate this loss, e.g. by seeking a guaranteed payment period or a survivors' annuity, both of which incur a reduction in the income instalments, but the only way of protecting the entire annuity fund for the benefit of a dependant, is by not crystallising the annuity, if this option can be afforded.
We're certainly opting to afford that option. The entire fund is more value to my survivor than the risk of the pension income received following tax deduction not equating to the value of the fund. (It would take 21 years for the net income (@ 20% tax loss) to exceed the fund value. Can 65 year olds guarantee 21 years survival ?
Please don't employ scare tactics to rush people into annuitising. It's a disreputable notion.