Pension Annuities…
…The cost of delay…

Converting your pension fund into an income is a complicated area, with many decisions needing to be made. For example, should the income be taken straight away or is waiting a few years in the hope of getting a higher retirement income a better option?

Here are a number of factors that may impact on your decision?

Falling annuity rates

Rates have seen a general downward trend in recent years, in fact one annuity index shows that they have fallen on seven occasions out of eight since 2009. This is largely due to the fact that people are living longer, but I suspect that this may continue to be case going forward.

Legislation

• European Legislation – The introduction of the new EU Gender Directive means that men and women will be offered the same annuity rates in future. In the past, women received less each year as on average they live longer. This change may see men’s rates fall by up to 5% while women’s rates increase slightly.
• Solvency II – This means that insurers which sell annuities will need to hold greater capital reserves, which in turn means that annuity rates will fall, and, the Bank of England’s decision to inject further money into the economy by buying gilts may push rates down further.

The cost of delay

Delaying decisions can mean missing out on potential income, which can take years to recoup over the same period if your fund value remains static.

I read an example in the press that said a 65 year old man can buy a yearly income of a little over £2,850 with a pension fund of £50,000, but a 67 year old man in the same situation could obtain a better annual income of just over £3,030. If the younger man delayed buying an annuity for those two years in an attempt to gain a higher income, with all the factors remaining unchanged, he will have given up nearly £5,800 of income in order to boost his annual income by a little over £180pa. It doesnt take a mathmetician to work out how many years it would take to recoup the income lost!

There are obviously a number of assumptions in this example, but I think you get the idea.

So, I hear you ask, “What’s the answer?”

If you believe that there is a chance that investment markets are going to rise over the medium to long-term, your situation may change, or that your health may deteriorate, then there is always a chance that delaying may mean you have a larger fund and access to impaired life annuities, which may be beneficial, however, if your fund remains static, and inflation continues at its current rate then you may be better not waiting.

There are literally loads of influencing factors, which is why it is important that we talk about this if you are thinking of retiring either now or in the next few years! So, feel free to contact me if you want to discuss your personal situation in more depth.

Tags: Annuities, financial adviser, Hull, IFA, income drawdown, Kirk Ella, pensions, Retirement Planning, unsecured pension, usp, withdrawa, Yorkshire

This entry was posted on Tuesday, January 24th, 2012 at 10:37 am and is filed under Information, Retirement Planning. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.