Don’t wait too long to buy annuity

Advisers have warned investors not to wait too long before buying an annuity.

“I would be very tempted to lock in now,” said Ros Altmann of Saga. “The downward pressure on annuity rates is hard.”

People who do not want to lock into a rate for life have the option of buying their annuity in stages – which might suit those who want to hedge the possibility that rates might rise.

Hybrid products, such as flexible and short-term annuities, allow individuals to lock into an annuity rate for as little as five years, with some products offering minimum income guarantees.

However, advisers say there are drawbacks to these products.

“Variable annuities tend to be expensive in terms of investment and management charges,” said Roger Breeden, principal, with Mercer Consulting. “You will also pay a premium to ensure you are not too exposed to market risk.”

Investors who have bigger pension pots could consider going into a drawdown and annuity combination, or a mix of fixed and investment-linked annuities.

“I am increasingly advising clients to have a core income of guaranteed annuity, topped up by an investment-linked annuity so that the investor will benefit from any future investment growth,” said Billy Burrows of Burrows & Cummins. “This will help to offset inflation.”

People with common medical conditions, such as diabetes, or who smoke, can boost their retirement income by up to 40 per cent by buying an enhanced annuity.

Richard Eagling of Moneyfacts, the financial comparison website, said that the difference between the highest and lowest open market annuity rate for a 65-year-old male was currently 17 per cent. For enhanced annuities, the potential uplift is even higher.

But he warned that the wide differences and fluctuations in rates make it “imperative” for consumers to shop around.

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