Getting the timing right on an Annuity purchase can be tricky, rates are falling almost daily, and many people are torn between buying now before rates drop further and waiting to see if rates, or indeed the pension fund, rise.
So, when your adviser tells you to buy an Annuity now, one of the natural reactions might be to think that he or she wants you to buy now so they benefit from a commission payment.
We thought we would take a look the three most common reasons people give for delaying their Annuity purchase and examine whether an adviser is correct if their advice is to buy now.
“Annuity rates might rise”
We’ve said many times that we don’t think Annuity rates will rise in the short term, there are just too many downwards pressures.
Gilt yields are likely to remain at all time lows, at least until Quantitative Easing comes to an end, the gender discrimination directive will come into effect in December, pushing down Annuity rates for men, and Solvency II is likely to have a similar effect when that finally comes into force.
Factor in our generally increasing longevity and there are few reasons to think Annuity rates, which our figures show have decreased by over 10% in the past year, will start to rise anytime soon.
“The stock market is doing well and my pension fund is rising”
We have spoken to a number of would-be retirees, who have said they wish to delay retirement for a short time, to allow their fund to grow.
We believe this is dangerous, as markets are often volatile, particularly over recent years, and a fall in value is just as possible as a rise.
Put it another way, would you invest a significant sum of money, which is vital for your future, into the stock market for a period of three to six months? The answer is almost certainly a resounding “no”, it’s just too risky.
It therefore makes no sense to leave money invested, open to market fluctuations, hoping for a short term gain; especially when the upside is likely to be relatively small.
“I’m not retiring for a few months, I’ll wait to buy”
There is a common misconception that people must have retired to take their pension, this is not the case, and in some instances, especially when Annuity rates are dropping, is can be sensible to buy your Annuity slightly earlier than you had perhaps planned to, even if you are still working.
Let’s take an example of a man planning to retire in six months’ time, does he buy the Annuity now, or wait for six months when he actually finishes work?
The first question to consider is Annuity rates, will they rise or fall during the next six months? The common consensus is that they will fall and we can see no reason to disagree.
Secondly we need to consider what will happen with the pension fund during the next six months. Most people are still invested in assets which could as easily fall in value as rise, and we generally recommend that people so close to retirement move to a Cash or Deposit based fund to protect the pension again volatility. But, whilst acting as a safe haven, due to the low interest rate environment, the majority of Cash or Deposit funds are currently providing a return around zero.
So, if you plan to move to Cash, which we believe is the only sensible option so close to retirement and you believe interest rates will fall, there is little to be gained from delaying the Annuity purchase.
True, if you buy whilst you are still at work you may pay some additional tax, but the income you get from six months of Annuity payments, even after tax deductions, is likely to be significantly more than you will get from a Cash or Deposit fund.
What are the reasons for delaying your purchase?
On the whole, we believe that if someone is moving to a Cash or Deposit fund in the months leading up to retirement, they are as well to buy the Annuity immediately. The income from the Annuity, even if tax is payable, will be better than that from the Cash or Deposit fund, and in the meantime it is likely that Annuity rates will have fallen further.
However, there are some disadvantages to buying your Annuity sooner than you had planned.
Firstly buying now might mean that an Enhanced Annuity, where income is higher due to health or lifestyle issues, is not an option, whereas it could be in years to come if your health worsens.
Secondly, we might be wrong an Annuity rates could defy all predictions and actually rise.
Thirdly, if you are planning to delay taking an income for a longer period, perhaps four or five years, this could be the time when Annuity rates start to rise, as the Bank of England start to sell the gilts they have bought through the Quantitative Easing (QE) program, which should cause gilt yields to rise.
Finally, and forgive us for ending on a sombre note, if you were to die before having bought an Annuity, the whole fund would be available, tax free, to your beneficiaries. Whereas if you have bought an Annuity, only income from the remainder of the guarantee period or spouse’s pension would be payable, if these options had been selected at outset.
We appreciate that the natural reaction to an adviser saying “buy now” may be one of scepticism, especially if a commission payment is involved.
However, given the current nature of investment markets, the downward trend in Annuity rates, the gender discrimination directive and Solvency II, we would suggest that careful consideration is given to whether it is better to bring forward your planned purchase date.
Our team of Independent Financial Advisers in Nottingham are experienced in developing retirement income strategies for clients the length and breadth of the UK. If you are approaching retirement and would like advice on your options call one of our IFAs today on 0115 933 8433, alternatively enquire online or email firstname.lastname@example.org