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14 September 2010

it can take 36 years to recoup 12 months’ lost income, warns Annuity Direct New data from Annuity Direct reveals shattering cost of pensions deferral Wealthier pensioners more likely to defer But 65 year old man with £500k fund would have to live till 101 to recoup one year’s deferral costs NEW data from retirement planning specialist Annuity Direct reveals pensioners face a ‘cripplingly’ long time to recoup lost income if they choose to defer buying an annuity and keep their pension fund invested in the stock markets. As poor annuity rates encourage more and more pensioners – in particular those with more substantial funds - to defer swapping their pension fund to an income for life (Association of British Insurers, September 2010), Annuity Direct warns that deferring can be a ruinously expensive option. “We calculate that a 65-year-old male with a £500,000 pension fund who defers for just one year would have to live for another 36.4 years, until he was 101, to recoup the lost annuity income,” said Annuity Direct’s Bob Bullivant “That £500,000 fund could buy the 65 year old male a £32,905 annuity today at conventional rates; a one year deferral would increase the annuity to £33,809 pa, assuming continuing market growth - but who would fancy the 36.4 years to recoup the lost income? “That same pensioner, by deferring for three years, would increase his annuity to £35,841 pa assuming five per cent fund growth in the markets - but it would take 33.6 years to recoup the lost income. To obtain 5% p.a. growth would require a risk based investment which may not be appropriate for someone so close to retirement. “A five year deferral would secure a £38,223 annuity based on a £500k fund, but expect 30.9 years to make up the 5 years’ worth of £32,905 he could have received in the mean time,” said Bullivant. “In other words the pensioner has effectively waved goodbye to £164,525 - unless he lives for nearly 31 years. And even with today’s increasing longevity, that epically long life scenario is still relatively remote. “It is easy to think that the answer to falling rates is to defer,” said Bullivant, “but this is a dangerous response in our view. “Pension fund planning at any level requires a careful analysis and understanding of the lost income over the deferral period and how long it will take to recoup that lost income when an annuity is finally bought – even if it is at a higher rate.” Bullivant said that those who had deferred over the past couple of years would have lost out as fund values had not increased significantly and annuity rates had fallen. “They can never recoup that lost income,” he added. Under current rules, individuals must buy an annuity – which turns a pension fund into a fixed income for life – by the age of 77. – Ends –

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