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Categorized | Insurance

Income warning over annuity delay

Posted on August 30, 2013

Elderly drinking tea in their home©Getty

Savers who put off buying an annuity for two years in the hope that rates will rise further may have to wait up to 41 years to recoup the lost pension income, according to new figures.

MGM Advantage, a pension provider, has calculated that a 65-year-old with a £100,000 pension pot would lose about £11,000 in income by putting off an annuity purchase for two years, if rates remained at the same level as today.

    Although delaying will mean receiving a higher income because the saver is older, MGM calculates that annuity rates would need to rise by at least 6 per cent from today’s levels for the total retirement income to break even.

    “It has been said that buying an annuity is a gamble, but then so is delaying an annuity purchase if rates do not improve,” said MGM.

    Even though annuities are often perceived as low-risk, others argue that savers take a gamble when they lock into a lifetime rate.

    “Buying an annuity is effectively deciding that you no longer want to have the chance for your fund to grow,” says Dr Ros Altmann, an independent pensions expert.

    “You do not believe your health will deteriorate further. You do not believe you will die sooner than the insurer expects. You cannot afford to delay the purchase of an income stream and keep your options open in case either your own or the market circumstances change.”

    “Clearly, there will be people who are comfortable with those decisions, and do not want to leave their options open, but many who buy annuities do not understand that they even have such options. “

    Since the beginning of the year, average annuity rates have risen by about 8 per cent largely in response to a rise in gilt yields,