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."

PROMOTED VIDEO
News
video
Life and Style
tech
Arts and Entertainment
Southern charm: Nicolas Cage and Tye Sheridan in ‘Joe’
filmReview: Actor delivers astonishing performance in low budget drama
Arts and Entertainment
While many films were released, few managed to match the success of James Bond blockbuster 'Skyfall'
film
Arts and Entertainment
Up my street: The residents of the elegant Moray Place in Edinburgh's Georgian New Town
tvBBC's The Secret History of Our Streets reveals a fascinating window into Britain's past
Extras
indybest
News
Albus Dumbledore, the headmaster of Hogwarts School of Witchcraft and Wizardry has been the teaching profession's favourite teacher
education
Sport
Luis Suarez looks towards the crowd during the 2-1 victory over England
sport
Life and Style
Cheesecake frozen yoghurt by Constance and Mathilde Lorenzi
food + drinkThink outside the cool box for this summer’s frozen treats
News
John Barrowman kisses his male “bride” at a mock Gretna Green during the Commonwealth Games opening ceremony
peopleBarrowman's opening ceremony message to Commonwealth countries where he would be sent to prison for being gay
Sport
Sir Bradley Wiggins removes his silver medal after the podium ceremony for the men’s 4,000m team pursuit in Glasgow yesterday
Commonwealth games Disappointment for Sir Bradley in team pursuit final as England are forced to settle for silver
Sport
Alistair Brownlee (right) celebrates with his gold medal after winning the men’s triathlon alongside brother Jonny (left), who got silver
England's Jodie Stimpson won the women’s triathlon in the morning
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Junior Research Analyst - Recruitment Resourcer

    £18000 - £20000 per annum + OTE £25K: SThree: SThree Group has been well estab...

    Senior Analyst - Financial Modelling

    competitive: Progressive Recruitment: This really is a fantastic chance to joi...

    Associate CXL Consultant

    £40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

    Business Anaylst

    £60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: Business Anal...

    Day In a Page

    Backhanders, bribery and abuses of power have soared in China as economy surges

    Bribery and abuses of power soar in China

    The bribery is fuelled by the surge in China's economy but the rules of corruption are subtle and unspoken, finds Evan Osnos, as he learns the dark arts from a master
    Commonwealth Games 2014: Highland terriers stole the show at the opening ceremony

    Highland terriers steal the show at opening ceremony

    Gillian Orr explores why a dog loved by film stars and presidents is finally having its day
    German art world rocked as artists use renowned fat sculpture to distil schnapps

    Brewing the fat from artwork angers widow of sculptor

    Part of Joseph Beuys' 1982 sculpture 'Fettecke' used to distil schnapps
    BBC's The Secret History of Our Streets reveals a fascinating window into Britain's past

    BBC takes viewers back down memory lane

    The Secret History of Our Streets, which returns with three films looking at Scottish streets, is the inverse of Benefits Street - delivering warmth instead of cynicism
    Joe, film review: Nicolas Cage delivers an astonishing performance in low budget drama

    Nicolas Cage shines in low-budget drama Joe

    Cage plays an ex-con in David Gordon Green's independent drama, which has been adapted from a novel by Larry Brown
    How to make your own gourmet ice lollies, granitas, slushy cocktails and frozen yoghurt

    Make your own ice lollies and frozen yoghurt

    Think outside the cool box for this summer's tempting frozen treats
    Ford Fiesta is UK's most popular car of all-time, with sales topping 4.1 million since 1976

    Fiesta is UK's most popular car of all-time

    Sales have topped 4.1 million since 1976. To celebrate this milestone, four Independent writers recall their Fiestas with pride
    10 best reed diffusers

    Heaven scent: 10 best reed diffusers

    Keep your rooms smelling summery and fresh with one of these subtle but distinctive home fragrances that’ll last you months
    Commonwealth Games 2014: Female boxers set to compete for first time

    Female boxers set to compete at Commonwealth Games for first time

    There’s no favourites and with no headguards anything could happen
    Five things we’ve learned so far about Manchester United under Louis van Gaal

    Five things we’ve learned so far about United under Van Gaal

    It’s impossible to avoid the impression that the Dutch manager is playing to the gallery a little
    Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

    Screwing your way to the top?

    Good for Lana Del Rey for helping kill that myth, says Grace Dent
    Will the young Britons fighting in Syria be allowed to return home and resume their lives?

    Will Britons fighting in Syria be able to resume their lives?

    Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
    Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

    Beyoncé poses as Rosie the Riveter

    The wartime poster girl became the ultimate American symbol of female empowerment
    The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

    The quest to find the perfect pair of earphones

    Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
    US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

    Meet the US Army's shooting star

    Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform