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.
Find the best annuity rate for your circumstances
"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
|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%|
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.