In more normal stock market conditions it might be feasible to wait for 12 months to see if annuity rates tick up, but these are unprecedented times, says Kevin Pacey, head of Bank of Scotland Annuity Service.
Richard and Susan Jones both celebrated their 65th birthdays last spring. At the time they considered themselves to be in the strong position of not requiring an income from their private pensions, instead living on interest from savings and buy-to-let property.
However, the landscape of the world economy has now shifted significantly. Interest rates have fallen, leaving a large shortfall for those relying on an income from savings. Concerned about whether they should purchase an annuity now or wait to see what rates they may be able to get in the future, they talk to their financial adviser, Brian Culleton.
Missed the boat?
‘So Brian,’ asks Richard, ‘have I totally missed the boat by not purchasing an annuity last spring? The stock market has fallen and interest rates are the lowest they have ever been. How much have I lost?’
‘I wouldn't worry too much Richard,’ replies Brian, ‘let me talk you through some of the details and then we can come up with a plan of action.
‘Last spring, you decided to hold off purchasing an annuity as you were in the fortunate position of not requiring an income from your pension at that time. You decided to delay the purchase, however, and it is true that both the stock market and annuity rates have fallen over the same period.
‘The critical point though is that two years ago we transferred your pension funds into a low-risk cash fund, from more volatile stocks and share funds. Many people approaching retirement age do not make the decision, or simply forget, to transfer their pension into safer funds. Our decision to do this has protected your overall pension fund from the significant turbulence seen in the stock market over the last year.'
Expect less
‘As such, should you want to buy an annuity at the current time, it is true that you would see a drop in income from the amount you could have got last year. For example, an annuity purchased with a pension fund of £100,000 last August would have provided an income of £7,719 per annum, compared with an annuity purchased last month, which would provide £7,348.