Taking the annuity route when retirement comes.

David.s_2

Can anyone tell me please if deferring an annuity is a common practice? Similar to the state pension deferments. If a person was to fix an annuity at age 55 with their pension pot at the time and defer starting to take the pension to age 65 they would benefit from life expectancy rates at the time of fixing the pension (from age 55) rather than age 65. The risk is that they might die in the ten year period and leave nothing to their family. The benefit would be a significantly better pension. Could the intermediate years each be deferred in the same way (with slightly less benefit each year)? Would I just find that the life expectancy adjustments are built in?

bigadaj

Not sure the question makes much sense.

You have stated an annuity hitch logically clues defined benefit pensions, most if not all other defined contribution pensions may have a target date for retirement but all you are doing is saving up a pot. This can be exchanged for an annuity, or taken in drawdown, lump sum etc at a particular age or can be left. It is normally more efficient to leave these in the pension as they will continue to grow tax free.

There are niche products like fixed term annuities, but in your example the benefit of deferring would be cancelled out by investment growth as well as the fact that an annuity at 65 obviously pays more than one at 55 as in all probability it will be paying out for many fewer years.

kidmugsy

Deferred annuities are sold in the US but nobody I've asked has heard of them here.

LXdaddy

Not heard of an option to purchase an annuity on a certain date but not draw income from it until some later date.

I think your argument is that average life expectancy at age 55 is less than average life expectancy at age 65. This is the somewhat surprising fact that the longer we live, the older we will probably be when we do eventually die.

I would think that rather than buy the annuity at 55 and draw at 65 you would be better holding the cash (and have it appreciate) and then buy the annuity at 65. That way the pot will be larger and should anything happen in the intervening 10 years the cash would be past on rather than lost.

dunstonh

Can anyone tell me please if deferring an annuity is a common practice?

What do you mean by deferring an annuity. An annuity is what you buy when you choose to buy it. There is no deferring involved. If you want it at 55 you buy it at 55. if you want it at 65 then you buy it at 65 or whatever age you want.

. If a person was to fix an annuity at age 55 with their pension pot at the time and defer starting to take the pension to age 65 they would benefit from life expectancy rates at the time of fixing the pension (from age 55) rather than age 65.

Ignoring the fact you cant do that, the annuity rate you would have got would be based on age 55. not age 65.

The risk is that they might die in the ten year period and leave nothing to their family.

But what is to gain? The normal way is to buy when needed. So, if you died in that 10 year period, then the beneficiary would get the full pension fund tax free. If you lived, you would then buy an annuity at 65 based on age 65 rates and any health conditions that were in place at that time.

David.s_2

LXdaddy wrote: »

I think your argument is that average life expectancy at age 55 is less than average life expectancy at age 65. This is the somewhat surprising fact that the longer we live, the older we will probably be when we do eventually die.

Precisely. According to a USA Social security 2.28 years longer for a man having reached 65. If you set up the pension at 55 with deferred starting date, the pension pot would change hands to the pension company but would still be invested money to fund the pension, hopefully staying ahead of inflation.
The potential gain is a 13% higher pension in real terms and the potential loss is that
you die in the 10 years and lose it all. I would question whether the latter matters if you're dead. How can it possibly matter to you after you are dead? Help your beneficiaries before you die and enjoy seeing the effects or take the higher pension.
Thank you kidmugsy for news of the possibility in the states.

coyrls

The argument for a deferred annuity is that it can act as a “back stop” insurance for a draw down strategy. So, as an example, you could purchase a deferred annuity at 65, that would start at say 90, you then arrange your drawdown strategy to provide an income until 90, in the knowledge that if you are still alive at 90, the annuity will start. You will get a better rate for a deferred annuity for 90 when you are 65, as there is a good chance you will die before 90 (i.e. it will be based on the survival rates from 65). If you waited until 90, you (by definition) will still be alive and so you will get a worse rate based on the survival rates from 90.

xylophone

http://www.sharingpensions.co.uk/pension_annuity12.htm#text5
"Deferred annuity
A deferred annuity have in the past been used for both a pension annuity (compulsory purchase annuity) connected with a pension fund or a purchased life annuity, but are more frequently used for immediately needs annuities. It offers an annuity that can be payable at some date in the future. The period between the start date and the maturity date is known as the deferred period and on maturity an income is paid for the rest of the annuitants life.

A deferred period is expensive as there is a cost of delay. During the deferred period it is usual for the annuitant to continue to pay regular premiums. In the event of the death of the annuitant during the deferred period, the premiums are typically returned to the estate and this may also include interest depending on the provider's terms. For purchase life annuities a cash option instead of the annuity can be offered.

A deferred annuity as part of an immediate needs annuity could be used when a relative enters a nursing home. If the prognosis is they will live for less than 2 years, then a deferred period of 2 years would be chosen. The estate would pay for the first two years of nursing home care and the deferred annuity would pay subsequent long term care costs for the rest of the annuitants life.

For many people conventional annuities from their existing provider offer "poor value for money". As deferred annuities are rarely offered by providers to individuals, one way to defer an conventional annuity purchase is a With Profits annuity. Here the annuitant can receive an income from an annuity and use a future annuity transfer option to convert to a conventional annuity at a later date."

David.s_2

dunstonh wrote: »

Ignoring the fact you cant do that, the annuity rate you would have got would be based on age 55. not age 65.
But what is to gain? .

One contributor seems to think that it can be done. It is possible here in a limited format with the state pension fund which is index linked.
A larger pension is the potential gain, approx. 13% more.

David.s_2

Thanks everyone for your replies. It is leading to a bit more research on my part.

bigadaj

David.s wrote: »

One contributor seems to think that it can be done. It is possible here in a limited format with the state pension fund which is index linked.
A larger pension is the potential gain, approx. 13% more.

Not sure you've understood the arguments against.

An annuity is a solution to provide a fixed income at a particular time, it therefore takes on risk. Your pension fund would be invested and expected to grow, so the larger pension would almost certainly be less than that which could be bought with the larger fund you would have accrued over that time.

No such thing as a free lunch. As others have said if you really want that level of guarantee then it might work but it would be costly.