What other issues must be considered?
There are a number of other issues to consider and some of these are covered below.
Death after TRetirement
The issues that arise in this scenario were covered in Module 9 Pension Scheme Death Benefits.
Contracted-Out Schemes
If the member was in a scheme that was contracted-out pre-April 1997 on a final salary basis then the scheme is responsible for paying a pension at least equal to the Guaranteed Minimum Pension (GMP) from their GMP due date (65 for men, 60 for women).
The annuity purchased must take this into account and increase the GMP element of the annuity each year in accordance with legislative requirements i.e.
When to purchase an Annuity
From April 2015, a member’s DC pot does not have to be used to purchase an annuity.
It will continue to be a common way of turning pension savings into income for life, but as there are now greater flexibilities available to members, an annuity may only be one part of a member’s retirement solution.
Annuity rates vary with market conditions and it may be best for the member to wait until rates get better. Generally the older a member is the more pension they will receive as they are not expected to live as long. Alternatively, the new flexibilities allow the amount of income from an annuity to be varied so for example, a member could choose to take less when they start to receive their State Pension.
These options allow the member to consider their changing needs during retirement and long term care to be included in any decision making.
Deferring an Annuity
Deferring an annuity does not necessarily mean getting a higher pension!
The member should consider:
| The amount of investment they are likely to receive by leaving the money where it is until the date they want to purchase an annuity. | V | The difference in the amount of income they could receive now and at the later date. |
Deferring an annuity - Example
A member is 60 years and 8 months old.
| A level annuity purchased now would provide an income of £6,183 p.a. | The member would receive £26,793 over the period to age 65 (£6,183/12 x 52 months). |
If he was 65 now
| A level annuity would provide an income of £6,792 p.a. | This is an extra £609 p.a. |
BUT
In this example, by deferring their annuity to age 65, the member would need to live for approximately 44 years to break even (£26,793 / £609) with the amount they would have received had they drawn their annuity from age 60 years and 8 months.
In reality
The funds would earn interest/investment growth until the annuity is purchased.
Mortality Drag
A member needs to consider the negative impact of "mortality drag” if they take regular withdrawals from the fund whilst deferring the annuity purchase. Mortality drag is the increasing risk that annuity rates will fall as deferring the annuity purchase continues. The risk grows exponentially the longer the member defers the annuity purchase.
In effect
Will the extra investment return justify the delay?
Poor health
When purchasing an annuity the member must also take into account their health and life expectancy. We looked at this in the Lifestyle module. But here is a reminder:
Annuity Rates
Annuity rates are affected by:
Enhanced Annuity
These rates could be up to 20% higher than normal annuity rates.
Examples of medical conditions are:
Impaired Life Annuity
If a member has a short life expectancy – typically less than 5 years – impaired life annuities offer significantly higher rates.
Cancer and heart problems are examples of serious medical conditions that would qualify for an impaired life annuity.
