'TIMING
ANNUITY PURCHASE'
Most
holders of Personal Pensions and other
forms of money purchase pension scheme
convert their funds to annuity as soon
as they retire, even though the rules
permit them to leave the decision until
age 75. But is this always the best
thing to do? After all, roughly one
in ten of today’s 65 year olds
will live to
be 100.
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Two
main factors affect the level of income which
can be secured by purchasing an annuity. One
is the return which the annuity provider thinks
it can achieve by investing the pension cash
which it receives, and the other is the size
of the pool of excess funds created by the death
of those annuitants who live less long than
expected.
At present rates, a 60 year-old man with a pension
pot of £100,000 could buy a pension annuity
of £6,500 a year. But this is only £1,000
p.a. more than the income from a Gilt-Edged
security which, unlike annuity purchase,
would leave the capital intact.
If, however, the man in question were to have
waited until age 75 to cash in his pension pot,
the £100,000 would have bought an annuity
income of £10,300 p.a. And if his health
had by then deteriorated it is possible that
he could have achieved an annuity income of
£15,000 p.a.
There are a number of ways of funding retirement
income while delaying at least in part the encashment
of pension pots. One is to live off the tax-free
cash and perhaps the income from other investments.
Another is to maintain pension funds in place
and to draw an income from them (“income
drawdown”). A third is to purchase a short-term
annuity.
A further advantage of delaying annuity purchase
is that with increasing age the number of unknowns
affecting the selection of annuity options decreases.
Graham Thomas |
