Cost of Delay

What should you consider when delaying an annuity purchase?

• Annuities work on a cross subsidy basis - those that die sooner than expected cross subsidise those that live longer than expected. If you purchase an annuity later (i.e. when you're older) then you will benefit less from this cross subsidy, hence the reason you may receive less income in total when you defer an annuity - this is know as mortality drag.
• Each month delayed is a month of income lost. It will take many years to recover this lost income, possibly beyond the age to which you're expected to live; an effect of mortality drag.
• Annuity rates may fall further for healthy lives as segregation of healthy\unhealthy lives become more popular (i.e. impaired life annuities). The effect is mortality drag on a greater scale because income is shifted at the outset from healthy lives to unhealthy lives. If you suffer from ill health then this may not affect you.
• If you remain invested, your pension fund continue to rise and fall and this will affect the amount of income your pension will purchase. If it rises you may negate the effect of mortality drag but if it falls then you will compound the problem
• There is a correlation between interest rates an annuity rates. Should interest rates rise then we may see higher annuity rates in the future (this calculator makes no allowance for this since no allowance is made for negative effects like increasing life expectancy).

This is not an annuity quotation, rates are not guaranteed. Assumes that annuity rates remain constant during period of delay