When should your clients buy an annuity?

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If clients are adverse to buying an annuity, they may be worried that they won’t get the best rates, or don’t want to commit too early when they could potentially use other retirement solutions.  

Unfortunately, there isn’t a common ‘sweet spot’ to determine when it’s time to purchase an annuity, and there are many personal circumstances to consider before making a recommendation. 

However, because the timing is often so personal, the relationships you’ve cultivated with clients will be an advantage, and can also help to highlight the value of your ongoing financial advice.
 

Key factors to consider 

When considering when to make a recommendation to purchase an annuity, it can come down to a range of factors, including: 

A client’s income needs now, and in the future. Do they have enough to meet their essential bills, such as utilities and food? An annuity can help make sure their basic needs are met. 

Their health and lifestyle and whether they have any serious medical conditions. If your clients have a qualifying health condition, they could receive an enhanced annuity rate. 

Your clients’ attitude to risk should also be taken into account. In our most recent Retirement Voice research 92% of people wanted a guaranteed income in retirement - but at the same time, 89% also said flexibility was important to them.  

You’ll know what is most important to your clients. If they’re looking for a guaranteed income for life, then an annuity may be the preferred choice. However, depending on their needs, they could use part of their pension pot towards an annuity and leave the rest invested, which can then be taken flexibly so your clients could have both a guaranteed and a flexible income.
 

How are annuity rates calculated? 

The amount of income your client will receive from their annuity depends on a number of things, for example the value of the pot used to buy the annuity, where they live, their health and lifestyle, the options they choose such as escalation or death benefits, and any remuneration taken by you. Age also plays a big part in this. Product providers calculate rates based on when a group of people the same age are most likely to die. For example, the average life expectancy for someone currently aged 65 is 87 for a woman and 85 for a man.  

Providers accept that some people will die earlier than expected, and that’s when they’re likely to make a profit - but equally, they make a loss for those people that live longer. The profits will usually subsidise the income of people who live longer than expected. So, the older a client gets after buying an annuity, they’ll likely have received a higher guaranteed income. This is known as Mortality Cross Subsidy.
 

Is it better for clients to wait? 

Not necessarily, they should take into account the cost of any delay. 

The longer a client waits to buy an annuity, the less likely they are to benefit from the Mortality Cross Subsidy. This is often referred to as the Mortality Drag. This is because they'll likely be fewer people in the pool who have died earlier than expected. So, the older your client gets before buying an annuity, they may need more in investment returns to combat the effects of the mortality drag.  

 

How to help clients get a higher income for life 

To help combat a potential loss due to a delay, it might be a good option to recommend your clients buy annuities in stages. If they use smaller portions of their pension pot to annuitise at different periods in their retirement, this could help them to maintain flexibility, while providing a higher guaranteed income as they move into old age. This option could also allow you to maintain your ongoing relationship with your clients as you help them to consider their personal circumstances and income needs in the future.  

Take a look at our Standard Life Pension Annuity to help your clients enjoy a guaranteed income for life.