Deferring your Annuity
When you reach retirement age, you can take the option of deferring your annuity. A deferred annuity is a type of annuity contract which allows you to delay the payment of your pension funds until you choose to receive them. This could mean a delay of income instalments or a lump sum.
Why defer my annuity?
Originally, insurance companies came up with the idea of deferred annuity as a product to help those who may be unable to come up with the full lump sum required to purchase an annuity upon reaching retirement age. Whilst this is still a valid reason for choosing to defer, deferring annuity is now becoming more attractive due to falling annuity rates. Life expectancy is increasing, and though this is fantastic news for your health, it could impact negatively on your pension income. Annuity providers are being forced to reduce their rates to lower their costs; the longer you live, the longer they will have to pay out.
If you are prepared to do it, deferring your annuity, even for a few years, could mean that your pension payments will not be as badly affected by the low rates.
Phases of deferred annuity
Deferred annuity consists of two phases. These are the accumulation and distribution phases. Whilst you are accumulating, you must be making regular payments to your annuity provider. These payments are collected and gather interest. One big advantage of this phase is that you are sheltered from taxation whilst you are making your payments.
When you move into the distribution phase, your provider will begin to regularly pay out your annuity. This will be governed by the contract you agreed to when you decided to defer your annuity. There are different types of deferred annuity, which can be affected by interest, economic performance and fixed terms of payment.
Is it worth deferring my annuity?
If you are financially prepared to defer your annuity, then for most people, it certainly seems like a good choice to make. However, before you take that step, it is worth making sure that the delay will be worth a significant difference and that you can afford to wait as long as that might be necessary. It is only worth waiting if you are sure that you will live long enough to make up the income that you deferred. A person putting off retirement at age 60, until the age of 65, may find themselves having to live to the age of 100 to actually make a worthwhile return. Obviously, you cannot predict how long you will live for, so before making this decision, you should take steps to find out how your annuity will be paid over the long-term, and whether you can receive extra benefits.
Deferring an annuity may be of extra interest to women, as they stand to be affected the most by falling annuity rates due to a longer life expectancy and an earlier age of retirement.
As with all annuities plans, it is worth doing the research. Take the time to see if deferring your annuity will actually be worth it, taking into consideration your current financial circumstances, your health and the options that different annuity providers can offer you.
Thinking of Retiring Soon? Have a look at our Annuity Comparison Table