Annuity Purchase - Now or 5 years time ?

jake+1

Like a lot of people,my pension pot is partly linked to the FTSE. Anyone got any thoughts as to whether its worth leaving a pot of say £100,000 for another 5 years or so, or buying an annuity now, bearing in mind whats happened over the past couple of years. [Horrible shrinking feeling !] Have not paid into the scheme for some years now due to redudancy. Age 63. Don't really need the money at the moment. Thanks

CannySaver_2

Hi

There are a couple of reasons why you might not want to take an Annuity now:

1. The value of your fund could be depressed due performance

2. Annuity rates are at all time lows due to a combination of increased life expectancy, low gilt yields, Solvency II, gender discrimination legislation etc etc

By all means do a quick online quote using a pension annuity calculator to see what you could get but if you don't need the income now then I would probably defer buying an annuity until your fund value rises, however I would not expect annuity rates to rise anytime soon, other than because you are older, which of course could be counteracted by lower rates generally.

If you do decide you want to take income then you could consider other options, such as a fixed term annuity (which will still mean crystalising a 'low' fund) or indeed income drawdown, which would give you an income whilst your fund remains invested; depending on your attitude to risk, this might allow for the best of both worlds i.e. an income now but with the fund remanining invested, in the hope that values will recover.

Finally, think about death benefits. At the moment the fund would be paid our free of tax, as soon as you vest then the options are less tax efficient and limited by the choices you make.

Hope this helps.

The Canny Saver

sandsy

However, the other factor to remember is that after 21 December next year, the rates for male annuities are expected to drop by about 10% due to the equalisation of male and female annuity rates.

However, if you were planning to purchase a joint annuity, the immpact would be reduced.

gfplux

So close to retirement your fund should not be in volatile things like equity's. Your pension manger should have moved you into funds that will preserve your capital.
Has this happened.?

CannySaver_2

gfplux wrote: »

So close to retirement your fund should not be in volatile things like equity's. Your pension manger should have moved you into funds that will preserve your capital.
Has this happened.?

Not necessarily, for example, if you are planning to take an income using income drawdown you are likely to invest at least part of the fund in equities, it therefore makes little sense to move into lower risk assets as you approach retirement only to move a proportion of the fund back into equities when you go into income drawdown.

Of course, if you plan to vest via an conventional annuity, or indeed a fixed term annuity, moving to less volatile assets in the years leading up to retirement is often sensible.

The Canny Saver

Meeper

I often draw the comparison to mortgages. If the mortgage rate was at it's highest for 20 years, would you take a long-term fixed rate? No? Well then as annuity rates are at their lowest for 20 years, why would you want to lock in those rates for your income for life?

CannySaver_2

Meeper wrote: »

I often draw the comparison to mortgages. If the mortgage rate was at it's highest for 20 years, would you take a long-term fixed rate? No? Well then as annuity rates are at their lowest for 20 years, why would you want to lock in those rates for your income for life?

Beacuse you think there is no prospect of them rising anytime soon, and that they will fall further?

Just a thought, personally I can't see any reason why annuity rates will rise over the next few years, which makes it all the more important to consider all retirement income options.

The Canny Saver

Meeper

Recovering global markets (and they will continue to recover) lead to increased investment in equities and less investment in fixed interest securities. Demand for gilts will fall, gilt yields will rise and as annuity rates are closely tied to gilt yields, there should be a rise in this market also. Perhaps not in the short-term, but certainly in the medium to long term.

Lately, I have been recommending fixed term annuities, such as the one with LV=. This gives a guaranteed future value after a specified period at which time the choice can be made again.

jamesd

Now doesn't seem to me to be a good time to buy an annuity.

Do you know that you can still take a lump sum and use "income drawdown" to take an income without buying an annuity? You leave the 75% of the money invested and take income from the investments. This can make it quite painless to delay buying an annuity until the economic situation recovers and increasing age improves your annuity rates.

You can invest the lump sum over time in a S&S ISA to provide ongoing income. Say using commercial property funds as an income source because those aren't in a bubble, unlike gilts and some other low risk government and corporate bonds.

There's no requirement to delay buying an annuity with all of the money. You could buy one for say £10,000 every three or so years to gradually transition from invested to uninvested.

I'm assuming that your health is fairly good with no substantial conditions that would substantially reduce your life expectancy. If there are any of those it's possible that you might qualify for an impaired life annuity or enhanced annuity that just might make it worth buying an annuity now.

If you have a spouse you might also usefully consider that income drawdown provides a 100% spousal pension with no reduction in income to get it, unlike an annuity. This can be sufficient reason to use some drawdown for income even where annuities are otherwise preferred.

sweeneytodd

Some good reasons above for delay no doubt.

As they say in the States 'Do the Math'.

Growth in your pot and advancing age is likely to get you a better pension in the future but, to state the obvious if you leave it for 5 years you'll have missed out on around £25k's worth of income.

jamesd

No need to miss out on the income - income drawdown provides it.