The Cost Of Delaying Retirement
17 Jan 2012
As annuity rates continue to fall, many people coming up to retirement are choosing to delay in the hope that markets and annuity rates improve enough to significantly increase their income. This article looks at the costs of delaying your decision to retire, which you may never recoup.
On the face of it, delaying your retirement by even two years may seem like a logical step to take. The assumptions you would make could be seen as reasonable. You'll be two years older, so the age factor will increase the annuity income you are offered. Your pension will be in the market for a further two years, potentially gaining from any improvement in the stock market. Gilt yields may recover from their Eurozone crisis lows (that is if the Eurozone crisis is solved) and you have two more years to contribute to your pension.
Perhaps the most obvious drawback of delaying your retirement, or turning your pension into an annuity, is the income that you would have missed out on in those two years, but it often gets missed. A recent example from MGM Advantage illustrated that it could take 32 years to recoup the income lost by delaying purchasing an annuity for two years. The full example is below:
A 65 year old man can buy a yearly income of £2,856 with a pension fund of £50,000, but a 67 year old man in the same situation could obtain a better annual income of £3,036. If the younger man delays buying an annuity for two years in an attempt to gain a higher income, with all factors remaining unchanged, he will have given up a total of £5,712 (£2,856 for each year) in order to boost his annual income by £180. At this rate it will take him 32 years to recoup the income by deferring his income for two years. If his pension fund grows, then the income will be recouped sooner.
Your options
If you decide that relying on the situation to improve is too risky and would rather make your life easier you can continue with your original plans and retire. There of things you can do to improve your retirement income, such as shopping around. By shopping around for the best annuity rate via TQ Protect, you could increase your retirement income by as much as 20%*. Many people make the mistake of taking the income on offer from their pension provider. - don't be one of them. You should also ensure you disclose any medical conditions or lifestyle factors that could increase your income, such as diabetes. With the help of TQ Protect, you can find out if you qualify for an enhanced or impaired annuity and add up to a further 30% to the value of your retirement income.
For those who are happy to take a different view, there are options available to you as well as a straightforward annuity. Fixed-term annuities are a relatively new innovation that allows you to take out short-term annuities, without committing to one for the rest of your life. The main benefit for many is that if your health changes during the term of your annuity, you may qualify for an enhancement when you renew. However, you must keep in mind that annuity rates may have fallen by the time you renew.
For more information on your options, please call 0800 408 1570, or find out more about annuities.
*Source: Annuities UK. Mintel 2009.
