I’m 74 and have delayed buying a pension annuity because of the poor rates. Can I still avoid taking an annuity once I am 75, in the hope that rates might go up?
Compulsory purchase of an annuity by the age of 75 was abolished in April 2011. This means that no one who has saved money in their own pension pot – as opposed to having a pension provided for them by an employer and dependent on their final salary – is now forced to buy an annuity as they used to be.
Now you can take money from the fund (drawdown) or leave it invested. Anything remaining in the fund on death can be left to provide a pension for a dependant or left to heirs, subject to a 55% tax charge.
The main factors in your decision will be the size of the fund, what other money you have to live on and your personal preferences.
Drawdown is suitable only for larger funds, or for people with an alternative income. Many people dislike annuities because they fear not getting their money’s worth. More worrying in my book would be living longer than my money lasted.
An annuity guarantees you an income for life – albeit with increasingly depleted spending power unless you choose one with index-linking. While the drawdown rules protect the duration of your income, its level is not guaranteed.
Don't under-estimate your life expectancy
So, whether you want to try to ‘beat the system’ and leave money for your heirs, or be certain that your cash lasts as long as you do is a personal choice. Don’t, however, underestimate how long you may live. In recent decades, life expectancy for a 65-year-old has been rising at a rate of 4-5 hours per day. At the age of 75, a woman can expect to live an average of 13.3 years and a man 11.8 years. That’s an average - you could live longer.
If you intend to take an annuity but delay to see if rates improve, you could also lose out. While it is true that rates have ticked up a little at the time of writing, experts counsel against delaying too long.
Although you could see a slight improvement in the rate you are offered as a result of economic factors and your advancing age, increasing longevity and regulatory pressures continue to bear down on rates. Meanwhile, every day that passes is income forgone, so the fact that you haven’t made withdrawals yet could be funding much of any uplift.
If you choose the annuity route, opt for the best type for your need - one, say, that provides income for a widowed spouse or increases with inflation. If you have medical or lifestyle issues you may also get a better rate, because you would not be expected to live as long as someone with no health problems.