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Should you delay buying an annuity for your retirement?

Research shows annuity rates set to remain low

With annuity rates, the product that pays you an income for retirement, reaching record lows in August this year, consumers are being warned not to delay buying an annuity or risk even lower returns.

Research from specialist annuity providers MGM Advantage has found that delaying the time when you buy an annuity could see you missing out on hundreds of pounds a year in income, if annuity rates continue their decline. 

Why are annuity rates falling?

In August this year, annuity rates hit a record low. They have been falling steadily since 2007, mostly because of falling gilt yields, which determine annuity rates. 

With the government carrying out more quantitative easing, the return paid by gilts has fallen, and depressing annuity rates even further. For more on annuity rates, see our 60-second guide to annuities.

But there is worse to come. The EU Gender Directive, which is set to equalise annuity rates between men and women, and Solvency II, which will force annuity providers to switch to lower-yielding forms of investment, could both negatively impact annuity payouts. So biding your time before buying seems even more tempting.

The perils of deferring your annuity

All this seems to suggest that taking your annuity later, once the dust has settled on these issues, is a good idea. But that’s not the case, according to MGM Advantage.

A 65-year-old man with a £100,000 pot would get a yearly income of £5,901 today. A 67-year-old man with a £100,000 pot would get an income of £6,165. So if the younger man deferred buying his annuity for two years, he would be short of two years’ income – or £11,802.

According to MGM, it would take him a whopping 44 years to recoup that money. And when you consider that the average life expectancy of a 65-year-old man is 21 years, delaying taking his pension seems less than worthwhile.

When should you buy an annuity?

Andrew Tully, pensions technical director at MGM Advantage, says: ‘All the signs indicate annuity rates will remain low in the short term – you would need a significant increase in rates to make the wait worthwhile.

‘With a huge choice of retirement options available, including investment-linked annuities for those who wish to take on some investment risk, a financial adviser can help maximise retirement income.’ 

Shopping around for the best annuity is crucial – if you stick with your provider, you could see your retirement income reduced by up to 46%. For more on the different kinds of annuity, visit our guide Annuity types.

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