Is now a good time to buy an annuity?
Whether it was buying that house before the market slumped, choosing Betamax rather than VHS or just picking fish over chicken last night at dinner, we all have decisions we wish we could remake.
However, hindsight is 20:20 and unless you have a crystal ball under your desk, it is very hard to be spot on with your choices all the time.
That said, you can mitigate the potential for problems. This is exactly what I tell people when they ask me whether now is a good time to buy an annuity. Yes, annuity rates are low at the minute and at some point in the future, the chances are they will improve.
But unless that crystal ball is handy, it is almost impossible to say exactly when. Do you really want to put your retirement on hold on the premise that things may get better sometime?
So the answer is not only to shop around and get the best possible rate, but also to structure your retirement so you get the maximum benefit from the retirement savings that you do have. So what should you do?
Deferring buying an annuity
Firstly, remember that the income you will get from your annuity is based on a variety of factors, including how long your insurer thinks they will have to pay out for. By managing this variable, you can get a better deal from your pension pot.
You don't have to buy an annuity just because your pension plan is maturing and you have received a letter though the post. Indeed, as the vast majority of pension schemes were set up before the end of the default retirement age, you may find that you are still working when you receive this type of notification.
So you can choose to put off buying an annuity until you need the income, are potentially in a lower tax bracket and would get a higher income from your pension pot due to your age. You can also defer taking your State Pension if you so wish.
If you do defer taking an annuity, when the time comes to cash in your pension, you will likely get a higher income because you are older, all other things being equal. There is also – somewhat morbidly – more chance of developing a medical condition which means you qualify for an enhanced annuity which pays more.
The problem is that you don't receive the income that you would otherwise have had while you deferred, and it can take 15 to 20 years to make back the income you've forgone – quite a sacrifice if you need the income now.
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Split your pots
You don't have to annuitize all your pension pots at once. You may find that at the start of your retirement, your State Pension, income from part-time work and your savings/investments mean you are financially comfortable.
So rather than converting all your pension pots into one and annuitizing, you can do this in phases.
This piece of advice is always relevant but when annuity rates are at what some are calling historic lows, it's more important than ever.
The Association of British Insurers (ABI) recently published example rate tables which clearly show that for a 65-year old purchasing an annuity with a pot of £18,000, the annual difference between the best (£1,099) and the worst (£839) was £260. And if they had smoked for 10 years, the rate would have been even higher at £1,277, which is £438 more per annum.
Now the ABI is very clear that these are simply examples, but it does clearly illustrate that by not shopping around, people can lose a significant amount of their annuity income. It is therefore incredibly worrying that only 30% of people take an annuity with a company other than their pension provider.
So, is now a good time to buy an annuity? As you can see, that rather depends on you and your circumstances. By making smart choices and shopping around, you can make the most of your retirement income in almost any interest rate environment.