We are often asked when the right time to buy an Annuity is.
As you approach retirement, more and more questions will pop into your head:
Should I wait until I actually retire?
Should I buy my Annuity now?
If I wait will Annuity rates have fallen further?
If I buy now will Annuity rates rise in the future?
Will I pay more tax if I take my Annuity whilst I’m still working?
It’s enough to confuse anyone so we thought we’d look at this in more depth and compare the pros and cons of buying your Annuity now or waiting until you actually retire.
Falling Annuity rates
Any pension Annuity comparison will show you that Annuity rates are currently low, very low in fact. During the last six months of 2011 our benchmark Annuity saw a drop of nearly 11%. If you wait to buy your Annuity rates may have dropped further leaving you worse off than if you had bought your Annuity earlier. We believe that the combination of falling gilt yields, Solvency II and the recent ruling banning gender discrimination when pricing insurance products, are likely to push Annuity rates still further down.
Of course, we might be wrong and the opposite could be true; if you buy now it is possible Annuity rates could rise and you are left with a lower income than if you had waited to buy your Annuity.
Many people protect the value of their pension fund by switching to Cash or Deposit based funds in the months leading up to when they will purchase an Annuity. The theory being that the fund will not fall significantly in value if the world’s stockmarkets go into meltdown.
However, the return you can expect to get from a Cash fund is low; according to Skandia the average Money Market fund on their platform produced a return of just 0.10% in 2011. Now, whilst past performance is not necessarily a guide to the future, very few people are predicting a rise in interest rates anytime soon. This means returns from such funds are likely to remain low and in many cases below what you are actually being charged for having the plan in the first place.
A 65 year old male, whose wife is three years younger, buying a typical Annuity including a 50% spouse’s pension, a 10 year guarantee and level in payment, can get an Annuity rate of around 5.5%; potentially more if he qualifies for an Enhanced Annuity.
Therefore does it makes sense to buy the Annuity now? Even if tax is paid at 20% or 40% the net return will be better than the pension will make invested in a Money Market fund.
Buying your Annuity early could temporarily increase your tax bill.
Any income paid to you by your Annuity will be added to other income you have and taxed accordingly, this could mean that you pay tax on your Annuity income at a higher rate than you might do in retirement.
Everyone’s circumstances are different but the tax you pay always needs to be factored into the timing decision.
Higher Annuity rates
It’s a well known fact that the older you are the better the Annuity rate you get, all other things being equal a male aged 65 will get a better Annuity rate than his friend who is three years younger.
But just how much difference does it make? The following pension Annuity comparison shows the current Annuity rate for a male approaching retirement, with a wife who is three years younger, assuming that he has a fund of £100,000 and wants to buy a level Annuity, with a 50% spouse’s pension and a 10 year guarantee.
|Age||Best Annuity rate per year||Cumulative increase|
|64 years||£5,430 Canada Life||N/A|
|64 years & 3 months||£5,539 Canada Life||£109 per year|
|64 years & 6 months||£5,564 Canada Life||£134 per year|
|64 years & 9 months||£5,590 Canada Life||£160 per year|
|65 years||£5,617 Canada Life||£187 per year|
It’s clear that waiting 12 months to buy the Annuity will currently give you an extra £187 per year; however the £5,430 which has been paid for preceding year also needs to be factored in, of course so must any tax payable.
Missing out on an Enhanced Annuity
As a very general rule the older you are the more likely you are to qualify for an Enhanced Annuity, which provides a higher income after taking into account medical issues and lifestyle factors such as smoking.
An Annuity can never be changed; therefore it’s too late to factor in an illness or other medical issue if it occurs after you have bought your Annuity. Buying too soon could potentially mean you miss out on an Enhanced Annuity.
Tough decision isn’t it?
Buy your Annuity too early and rates might rise, you could end up with a higher tax bill you could miss out on an Enhanced Annuity.
Wait, and Annuity rates might have fallen and your fund could remain static whilst you shelter it from the risk of stockmarket investments.
The right decision depends on your own personal circumstances and there is no simple answer.
We are of course here to help, our team of Independent Financial Advisers in Nottingham deal with people the length and breadth of the UK wrestling with just this problem.
Our advisers are experienced in helping people make this crucial decision and would be delighted to hear from you.