Don't delay buying an annuity

It is obvious that for every year you put off purchasing an annuity, you lose a years income. So when you eventually buy your annuity you have to hope that:

Annuity rates are substantially higher, and/or
your pension fund has grown substantially, enabling you to buy a proportionately bigger annuity

To hope for substantially higher annuity rates is dangerous. Equally, it is extremely dangerous to hope for substantially better investment growth over a relatively short time frame to boost your eventual pension income - if you are nearing retirement, you should be reducing risk, not taking on more.

For example, if you are aged 60 there is a more than 70% likelihood that you will live to age 75. If you don’t buy an annuity at age 60, to ensure you can buy an equivalent annuity in the future your pension fund will need to grow at 2-3% above long term gilt yields, so growth will need to be 7%-8% per annum.

The reason why this extra growth is required is because of “mortality drag”, which we consider in more detail in the income drawdown section.

To summarise, if at your retirement date you decide to delay taking your rtirement income, you might need to take on extra investment risk to ensure that your eventual income keeps pace.

Thanks for your e-mail news letter. Always a joy to recieve. Informative and thought provoking....
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