Act now on shrinking retirement incomes
Annuity rates continue to fall, leaving anyone close to retirement with an urgent decision to take
Gambling with retirement income may sound foolish, but it's what anyone taking a pension payment has to do. Payouts depend on the prevailing annuity rate, which means picking the wrong time to buy could leave you locked into a low rate.
But with annuity rates in freefall, delaying in the hope of getting a better rate could mean losing out on thousands. Three years ago, annuity rates were at almost 7 per cent. Now they've fallen to nearer 5.5 per cent, according to MGM Advantage, with further declines in prospect.
It means payouts for a 65-year-old with a £100,000 pension pot have fallen to £5,901 a year. With payouts partly determined by life expectancy, there could be some logic in delaying taking an annuity. Temptingly, a two-year delay could increase annual payouts in our example by £264.
But delaying would also mean giving up two years of income. That would be £11,802 in our example – which would take 44 years to recoup through the higher payout.
"With annuity rates at an all-time low it could be tempting to delay in the hope that rates will recover," said Andrew Tully of MGM Advantage. "But the signs indicate annuity rates will remain low in the short term."
The situation is likely to get worse after an EU gender directive comes into force in December outlawing the practice of offering different terms to men and women.
"The gender directive will equalise annuity rates for men and women which is likely to push male annuity rates down," warned Laith Khalaf of Hargreaves Lansdown. "Male rates could fall by 5 per cent or more; the Treasury suggests rates might fall by as much as 13 per cent."
But the best solution may not be to simply take an annuity now. One alternative is to use investments to yield an income and buy an annuity later, according to John Fletcher of Brewin Dolphin. "If investors opt to draw down their cash and include defensive stocks in their portfolio, they could enjoy returns which compare favourably with poor annuities – and keep their options open to buy an annuity if things change in the future."
Alan Higham at the specialist adviser Annuity Direct said such an approach was risky. "For those prepared to take some investment risk then over the next five to 10 years there is a decent chance of beating the annuity – but you could lose around 30 per cent if you were unlucky with market movements," he pointed out.
"Buying an annuity now is likely to be the right thing for those willing to accept inflation risk and want a guaranteed income with no risk."
But Wayne Slater of Spectrum Independent Financial Services said there were tax implications to consider. "If people rush to take an annuity now while they are still employed, they will pay tax on their annuity income at 20, 40 or 50 per cent," he pointed out. "They need to calculate whether they would be better off waiting until retirement when they could be paying the basic tax rate."
Other issues to bear in mind were relationship status, occupation, income, health, other debts, goals and attitude to risk, he said. "This is where taking advice can be vital."
- 1 I was a Woman Against Feminism too
- 2 Fifty Shades of Grey movie trailer released: First look at Jamie Dornan as Christian Grey
- 3 Is Gideon Levy the most hated man in Israel or just the most heroic?
- 4 Students offered grants if they tweet pro-Israeli propaganda
- 5 The Tory donor whose firm is one of Britain’s biggest tax avoiders - with HMRC's blessing
Malaysia Airlines MH17 crash: Vladimir Putin is given 'one last chance' to end hostilities in Ukraine
The 'scroungers’ fight back: The welfare claimants battling to alter stereotypes
The truth about conspiracy theories is that some require considering
Arizona execution lasts two hours as killer Joseph Wood left 'snorting and gasping' for air
Malaysia Airlines MH17 crash: Ukrainian military jet was flying close to passenger plane before it was shot down, says Russian officer
Malaysia Airlines MH17 crash: Massive rise in sale of British arms to Russia
iJobs Money & Business
£18000 - £20000 per annum + OTE £25K: SThree: SThree Group has been well estab...
competitive: Progressive Recruitment: This really is a fantastic chance to joi...
£40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...
£60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...
Day In a Page
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000
A three-bedroom, coach house with luxury open-plan living space and contemporary breakfast bar