Annuity Quotes on MoneyHelper question

Reclining_Chair

Hi, I'm new here and am hopeful that I'm posting this in the correct place.

On the MoneyHelper website I have received annuity estimates for starting a pension at different ages. If, for example, I ask for an escalating quote for a 58 year old I am quoted more than if I was 57 but the annuity starting at 57 will have escalated over a year to more than the starting annuity income for the 58 yr old.

Why is this? What am I missing? Why would I wait until 58 (assuming my pension pot does not grow)?

Thanks for your help,
R_C.

af1963

If you're assuming your pension pot doesn't grow in cash terms, you're assuming it will have lost value because of inflation.

Waiting till 58 could deliver less income if your pot loses value , or more income if it grows quickly. Annuity rates could also change in either direction during the year.  Buying the annuity at 57 will lock in the current annuity rate and the future payments also won't depend on future investment performance.

If you wait to buy it at 58 and your pot growth exactly matches inflation ( let's assume 3% as an example) then next year you will have £103 for every £100 you have now, so you'd have 3% more with which to buy an annuity. If rates haven't changed, that would buy 3% more than the "start at 58" quote you're getting now.  Meanwhile, the "start at 57 this year" annuity figure would also have had a 3% inflation increase.  So the one starting at 58 would stay ahead by the same percentage, and would continue to be slightly higher every year after.

Reclining_Chair

af1963 said:

If you're assuming your pension pot doesn't grow in cash terms, you're assuming it will have lost value because of inflation.

Waiting till 58 could deliver less income if your pot loses value , or more income if it grows quickly. Annuity rates could also change in either direction during the year.  Buying the annuity at 57 will lock in the current annuity rate and the future payments also won't depend on future investment performance.

If you wait to buy it at 58 and your pot growth exactly matches inflation ( let's assume 3% as an example) then next year you will have £103 for every £100 you have now, so you'd have 3% more with which to buy an annuity. If rates haven't changed, that would buy 3% more than the "start at 58" quote you're getting now.  Meanwhile, the "start at 57 this year" annuity figure would also have had a 3% inflation increase.  So the one starting at 58 would stay ahead by the same percentage, and would continue to be slightly higher every year after.

Thank you very much for the response. Appreciated.

Please let me elaborate. If I buy a 3.5% escalating annuity today starting when I'm 57 then in a year's time (after the 3.5% escalation) the income will be greater than the starting income of an annuity I buy today which starts when I'm 58. I will also have received a year of income.

It just doesn't seem to make sense to me.

Reclining_Chair

Ps. I'm only thinking of buying an annuity today starting when I'm 58 (in a year's time) because I would like to lock in the annuity rate. Annuity rates seem favourable right now and might fall too much for me to afford retirement if I leave it for another year.

af1963

Had a look at the Moneyhelper calculator.  It's not very explicit about what the quotes generated actually represent.  In particular, are they really an accurate quote based on handing over the money *today* to get an annuity starting at some future date ?  I suspect you'd only find out by getting the actual underlying quotes. But when I was purchasing last year, all the quotes were based on paying immediately before the annuity income started. ( with options for monthly/annually etc and in advance / in arrears ).

I ran a test :  someone age 57 this month taking an income NOW, and someone 57 in a year's time taking an income in a year's time.  Both give the same figures. Checked again for someone age 57 in two years taking an income at 57 and got the same.  That suggests it's just quoting a current annuity rate for a 57 year old in all cases.

Reclining_Chair

af1963 said:

Had a look at the Moneyhelper calculator.  It's not very explicit about what the quotes generated actually represent.  In particular, are they really an accurate quote based on handing over the money *today* to get an annuity starting at some future date ?  I suspect you'd only find out by getting the actual underlying quotes. But when I was purchasing last year, all the quotes were based on paying immediately before the annuity income started. ( with options for monthly/annually etc and in advance / in arrears ).

I ran a test :  someone age 57 this month taking an income NOW, and someone 57 in a year's time taking an income in a year's time.  Both give the same figures. Checked again for someone age 57 in two years taking an income at 57 and got the same.  That suggests it's just quoting a current annuity rate for a 57 year old in all cases.

Thanks very much af1963. I think you're correct. I'll contact one of the listed firms such as Legal & General and see if I can get a variety of quotes instead of just relying on moneyhelper.

I'm still at the information gathering stage but once I feel more confident I'll be contacting a financial advisor to run me through my options.

Thanks again,
R_C.

Murmansk

Sorry to butt in here but I've been trying to use the Annuity Checker on Moneyhelper and can't get past stage two - it keeps taking me back there to enter my details when I click on the Next button from stage 3

DRS1

Reclining_Chair said:

af1963 said:

Had a look at the Moneyhelper calculator.  It's not very explicit about what the quotes generated actually represent.  In particular, are they really an accurate quote based on handing over the money *today* to get an annuity starting at some future date ?  I suspect you'd only find out by getting the actual underlying quotes. But when I was purchasing last year, all the quotes were based on paying immediately before the annuity income started. ( with options for monthly/annually etc and in advance / in arrears ).

I ran a test :  someone age 57 this month taking an income NOW, and someone 57 in a year's time taking an income in a year's time.  Both give the same figures. Checked again for someone age 57 in two years taking an income at 57 and got the same.  That suggests it's just quoting a current annuity rate for a 57 year old in all cases.

Thanks very much af1963. I think you're correct. I'll contact one of the listed firms such as Legal & General and see if I can get a variety of quotes instead of just relying on moneyhelper.

I'm still at the information gathering stage but once I feel more confident I'll be contacting a financial advisor to run me through my options.

Thanks again,
R_C.

Not sure but you may find no-one will quote for an annuity starting more than 30 days after the quote (ie you have to pick a start date and that must be within a certain time of when you are asking for the quote).  I really doubt you will get a quote today for an annuity starting next year.

FIREDreamer

DRS1 said:

Reclining_Chair said:

af1963 said:

Had a look at the Moneyhelper calculator.  It's not very explicit about what the quotes generated actually represent.  In particular, are they really an accurate quote based on handing over the money *today* to get an annuity starting at some future date ?  I suspect you'd only find out by getting the actual underlying quotes. But when I was purchasing last year, all the quotes were based on paying immediately before the annuity income started. ( with options for monthly/annually etc and in advance / in arrears ).

I ran a test :  someone age 57 this month taking an income NOW, and someone 57 in a year's time taking an income in a year's time.  Both give the same figures. Checked again for someone age 57 in two years taking an income at 57 and got the same.  That suggests it's just quoting a current annuity rate for a 57 year old in all cases.

Thanks very much af1963. I think you're correct. I'll contact one of the listed firms such as Legal & General and see if I can get a variety of quotes instead of just relying on moneyhelper.

I'm still at the information gathering stage but once I feel more confident I'll be contacting a financial advisor to run me through my options.

Thanks again,
R_C.

Not sure but you may find no-one will quote for an annuity starting more than 30 days after the quote (ie you have to pick a start date and that must be within a certain time of when you are asking for the quote).  I really doubt you will get a quote today for an annuity starting next year.

The best you can do is get an annuity paid annually in arrears.