Cost of delaying an annuity

For those approaching retirement many wonder whether it is prudent to defer buying an annuity in the hope that annuity rates will steadily increase and so provide a better return. The table below shows that this isn’t always the case.

Effects of deferring an annuity from age 65 to 66 (based on fund value of £100,000 at age 65)*

Age of client	66	67	68	....	77	78	79
At end of year	1	2	3	....	12	13	14
Cumulative annuity received
Starting at age 65	£8,025	£16,050	£24,075	....	£96,301	£104,327	£112,352
Cumulative annuity received
Starting at age 66	£0	£8,962	£17,385	....	£95,616	£104,308	£113,000
Annuity difference	-£8,025	-£7,358	-£6,690	....	-£685	-£19	+£648

* N.B. At age 66, fund value becomes £104,841

By deferring the annuity by just one year – until age 66 – assuming the fund value has increased and based on the annuity payable to a 66 year old, the annual income from the annuity will increase to £8,692 (based on current annuity rates). However, it would take the annuitant around 13 years to make up the lost income.

Other Annuity Risks:

Increases in life expectancy as you get older could result in improved mortality rates and as a consequence relatively lower annuity rates. If your health were to worsen you could qualify for a higher annuity but equally, if a diagnosed medical condition were to improve you may qualify for a lower rate.

The Advantages of Deferring Annuity Purchase:

• Strong fund performance could give you more in your fund which would increase taxfree cash and give a higher annuity.
• If you died before taking annuity benefits, the whole fund may be available as cash to your dependants or estate.
• Your annuity has been purchased later meaning that the guarantee period will finish later and thus your estate may receive more benefit if you die.

Annuity rates could get better if:

• 15 year gilt yields improve.
• Overall longevity decreases (life expectancy decreases).
• Your health deteriorates, qualifying you for a higher level of annuity via an Impaired Life Annuity.

The Disadvantages of Deferring Annuity Purchase:

Annuity rates could get worse if:

• 15 year gilt yields reduce.
• Insurers price for improving longevity (life expectancy).
• Your health improves, meaning you no longer qualify for an Impaired Life Annuity.

• Poor fund performance could give you less in your fund, resulting in less tax-free cash and a lower annuity.
• You will not have access to tax-free cash until you start to draw benefits.
• You will need to have sufficient income from other sources to support yourself (you may have to continue working).