Staying in pension drawdown too long before switching to an annuity could cost some pensioners more than £70,000 in lost payments, according to retirement money specialists.
The problem is income drawdown may not deliver enough money after age 75, as the fund diminishes and inflation erodes investment returns.
Meanwhile, because the fund is in drawdown and not in an annuity, the benefits of mortality cross-subsidy are lost.
Mortality cross subsidy is the share-out of cash annuity holders pick up from other annuity plans where the holders have died earlier than expected.
Pensions and annuity firm MGM Advantage has highlighted the risk by releasing some figures to show the effects of staying in drawdown for too long.
TABLE: Potential missed income from delaying annuity purchase
| Annuity purchase age | Years 1-5 | Years 6-10 | Years 11-15 | Years 16-20 | Total over 20 years |
| 60 | £2500 | £4700 | £7800 | £12200 | £27200 |
| 65 | £4500 | £7900 | £12900 | £20200 | £45500 |
| 70 | £7600 | £13300 | £21600 | £33400 | £75900 |
Based on a quote for the MGM Advantage Flexible Income Annuity, male, single life with £100,000 pot, showing the predicted mortality cross-subsidy (Lifetime Bonus).
The firm suggests the best course of action is a ‘halfway house’ between drawdown and annuity.
Pensioners need to compare likely drawdown returns with those of an annuity, bearing in mind the best time to switch is generally considered between aged 70 and 80.
“The danger is now no one is legally obliged to purchase an annuity at age 75, they will drift along in drawdown without understanding the progressive risk,” said Aston Goodey, MGM Advantage sales and marketing director.
“Drawdown becomes less suitable over time. Beyond age 75 the ability to deliver consistent investment returns that compensate for the absence of mortality cross-subsidy become increasingly unrealistic. Coupled with rising inflation, this highlights how unsuitable drawdown is as a long-term solution for some people.”
One solution is a phasing the change from drawdown to annuity by transferring part of the fund at regular intervals.
Several financial providers offer these products that try to deliver the benefits of drawdown and an annuity, including mortality cross-subsidy, coupled with low fees.
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