Deferring Your Annuity Purchase

Annuity rates (see Calculating Your Annuity) are no longer as generous as they once were, now that the average life expectancy has risen and continues to rise. The longer you are expected to live, the lower the annuity you can expect to receive. Women, who live significantly longer than men on average, can also expect a smaller annuity offer than a man of the same age with a pension fund of the same value. You may be able to receive a more generous annuity if you are prepared to defer the purchase for a few years. A client retiring at fifty will be offered a much smaller annual pension than a client retiring at seventy, because their annuity will be paid for longer. If you can afford to defer purchasing your annuity, make sure that the improved annuity will reflect the money you have lost out on whilst waiting; for example, you are offered an annuity of six hundred and fifty pounds when you want to retire at sixty. If you wait until age sixty-five you are offered an annuity of seven hundred and fifty pounds. Over the five years you have lost 5 x £650 = £3,250 of retirement income. How many years will you need to live until the improved annuity of seven hundred and fifty pounds a year is worthwhile?

The table below shows that deferring your annuity for a few years is only worthwhile if the improved annuity you receive later on is improved by a significant amount. In order to receive more money from the insurance company with your improved annuity than you would have done had you begun drawing your reduced annuity five years earlier, you would have to live until age one hundred, a total of forty years, and even then you would have received only two hundred and fifty pounds extra.

Deferring the purchase of your annuity is not likely to be worthwhile in this case. If however you were offered an annuity of five hundred pounds at age sixty but eight hundred pounds at age sixty-five, you would have to wait only fifteen years to see a significant increase in the amount of money you have received from your insurance company. By age eighty you have received two thousand pounds more with your improved annuity than you would have done with your reduced annuity.

Once you have been given an annuity quotation it is important to determine how your annuity will be paid over the long-term. Some annuities will pay you the exact annuity you are due each year. Other annuities will be increased to allow for inflation or a rise in prices, and some will offer additional benefits, such as an annuity paid for a minimum period of time, even if you die within this period.

For details of the different annuities on offer see Types of annuity.