Soft pears or crunchy pears is a surprisingly emotive debate in our house.
My wife enjoys the apple-like crunch of what I dismiss as an underripe disappointment. I prefer to wait for the perfect softness – though a recent thunderstorm taught me the risk of patience, when the pear I had my eye on hit the ground and was swiftly snaffled by squirrels and birds.
Retirement income planning poses a similar challenge: wait too long, and what looked like a better option may be gone before you can enjoy it.
Delaying annuity purchase sounds clever on paper: drawdown first, annuity later, maybe not until your 80s. It’s an idea doing the rounds again, often backed by slick charts suggesting you’ll get the best of both worlds. But the reality is messier – and the risks are real.
Freed from the nine-to-five, plenty of retirees eat better, exercise more and actually keep up with medical checks
The problem with neat charts is they usually show median outcomes. That might be fine for group analysis, but advisers know very few real clients actually live on the median. Outcomes often land far above or below it, which matters a lot if it’s your only retirement income at stake.
Here are three things advisers should keep in mind before recommending a late-life annuity strategy:
1. Mortality curve and the survivor benefit
At its heart, an annuity pools risk: when people in the pool die, their remaining pot is used to support the income of the survivors.
Roughly one in five pensioners will die in the first decade of retirement. Delay annuity purchase until later, and you miss out on that redistribution. And it’s not just any redistribution – early deaths tend to mean bigger pots, so the gains are at their richest in those years. Wait too long, and you’re left with slimmer pickings.
2. Health and lifestyle matter
There’s an argument that delaying annuity purchase means your health will have declined, so you’ll qualify for an enhanced, medically underwritten rate.
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That might work if you plan to spend retirement on the sofa, in the pub at lunch, or loading up on cream teas. But that’s not how many retirees live today. Freed from the nine-to-five, plenty of people eat better, exercise more and actually keep up with medical checks.
And since almost all annuities are underwritten now, insurers already price in the average decline in health with age. Unless your health worsens faster than average, delaying is more likely to make your annuity more expensive, not cheaper.
3. Today’s price is certain. Tomorrow’s isn’t
Right now, you can get a reliable annuity quote – either through MoneyHelper or, for advisers, via proper pricing engines with a guaranteed window.
Ten years down the line? Who knows. Annuity pricing is tied to gilt yields plus a margin. We don’t know whether gilts will be higher or lower, or how that margin will shift.
Unless your health worsens faster than average, delaying is more likely to make your annuity more expensive, not cheaper
Capital availability, reinsurance terms, FSCS levies – all these affect pricing. A market change could easily make annuities more expensive than they are today. Sometimes, the bird in the hand really is worth more.
So, what’s the answer?
There’s no one-size-fits-all. Good advice is personal, tailored and based on circumstances. And it doesn’t have to be all or nothing. Phased annuity purchase – buying slices each year – can smooth the risks, much like phased asset allocation.
But let’s be honest: for most clients, “I’ll wait until I’m 80” isn’t a strategy – it’s a gamble. And in retirement planning, gambling with your only source of guaranteed income is a very high-stakes bet.
Andrew Martin is chief commercial officer at Dunstan Thomas
