The Pros and Cons of Deferring Your Annuity

What does it mean to defer your annuity?

Deferring your annuity means to take the option of delaying when you receive your pension funds. Due to falling annuity rates, deferred annuities are starting to look more appealing to those who think they could improve their pension income in later years by putting it off for a while. Before you consider deferring your annuity, it is very important to make yourself aware of the benefits and disadvantages present in doing so.

The advantages

• If you live longer, you stand to gain more, as your annuity will be payable for a longer period of time than expected.
• Annuity rates may continue to fall with rising life expectancy. By delaying your annuity, you could find that you do eventually receive a higher income than those receiving a standard annuity.
• If you purchase you annuity later in life, the period of guarantee will last longer. This means that your estate could gain from more benefits after your death.
• Annuity rates are better the older that you are. You could also stand to benefit from better annuity rates, should they rise whilst you are deferring.

The disadvantages

• We cannot predict the future. The success of delaying your annuity is largely dependent on you living longer, and how annuity rates change in the future. We cannot guess beyond tentative predictions to either of these things. This can make deferring your annuity somewhat of a gamble.
• You will need to support yourself whilst deferring your annuity. This could mean a significant financial strain if you are not adequately prepared for it.
• Until you enter the distribution phase of deferring your pension, you will not have any access to tax-free cash.
• Annuity rates may not change. Although it is possible that annuity rates may improve during a period of deferment, they are not likely to. Even if the rates are the same, you may just end up losing the income that would have been paid to you had you not deferred. If we say that you could have been receiving an income of £600 (fixed) per month,  that would mean a loss of a potential £3600 over six months.
• Deferring your annuity could mean an investment risk. Any funds that you have left invested in the stock market may be in danger of significant losses in the market.
• The increased life expectancy which has affected annuity rates may mean an improvement mortality rate, and furthermore, a lower eventual income.

Summary

You should not immediately fall for the popular assumption that you will benefit from delaying your annuity. In theory, it seems like a glowing prospect at a time when your pension income could be badly affected by falling annuity rates. However, for most, a deferred annuity could be a big, costly mistake. If it isn’t the right choice for you, you could end up losing more than you would on a standard annuity. Ensure that you have done the appropriate research and that you are likely to benefit by a sufficient amount, before taking this step. You should always consult a financial expert before taking any significant decisions regarding your retirement funds.

Thinking of Retiring Soon? Have a look at our Annuity Comparison Table

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