A Matter of Life and Death: Timing Your Annuity Purchase

17 January 2025

5 min read

Annuity purchase is not just a question of whether, but when to buy.

UK defined contribution (DC) savers are increasingly at risk of outliving their savings (“longevity risk”). In a new investment regime that will likely feature structurally higher inflation, as well as lower and less stable real investment returns, savers are set to accumulate smaller pots in real terms than before—and live for longer, too. To reduce the risk of running out of money, we believe that buying an annuity to lock in a guaranteed income could become more attractive for risk-averse savers.

Many DC savers think their key decision is simply whether or not to annuitize. But our research shows that the timing of an annuity purchase is crucial—and that around age 75 may be a turning point.

Annuities Can Offer Good Value—If the Timing’s Right

During the ultra-low-interest-rate period before the COVID pandemic, bond yields approached historic lows—and annuity prices neared historic highs. DC savers balked at surrendering their capital to insurers in return for a paltry annual income. But more recently, higher yields have made annuity purchase comparatively more attractive.

Consequently, DC savers’ interest in annuities has increased markedly in recent years. According to retirement data published by the Financial Conduct Authority (FCA), annuity sales increased by nearly 39% between the 2022–2023 and 2023–2024 tax years.

Beating Inflation Takes Real Assets

In a higher-inflation environment, investors need real assets to maintain and grow the value of their portfolio over the long term. Choosing the right asset mix from a wide range of options will depend on a variety of factors, including a saver’s time horizon and the likely rate of inflation (Display).

Real Growth and Inflation Toolkit Has Evolved over Time

Over the Saving Life Cycle, Needs Typically Evolve from “Real Growth” to “Inflation Hedging”

An array of assets and strategies includes e.g. gold, renewables/power delivery, equity momentum and cross-asset momentum.

For illustrative purposes only.
FCF denotes free cash flow
As of December 31, 2024
Source: AllianceBernstein (AB)

Considering both the complexity of some of these investments and the fact that DC savers typically have a low level of investment expertise , we think savers will mostly need professional help both pre- and post-retirement. In our view, two approaches are likely to become increasingly popular: a lifetime income default strategy that provides a post-retirement income and/or an institutional-quality dedicated post-retirement income drawdown solution. Both approaches can be used to dovetail with annuity purchase or to replace it.

Annuity Timing Needs Careful Consideration

Retaining exposure to real assets will be an important factor. Fixed-income investments can still play a part in DC savers’ retirement strategies. But in a higher-inflation environment, investing in fixed-income assets over a long period will result in disappointing real returns. Consequently, buying a level annuity prematurely will likely be a mistake, as these products offer a fixed nominal regular income, which the insurer backs mostly or completely with fixed-income assets. Hence, purchasing such an annuity at a UK state pension age of 66 or 67 will probably be suboptimal, as it will prematurely lock in low real returns and forego the option of investing for longer in real assets that can beat inflation.

But from age 75, the opportunity cost of not annuitizing starts to mount. It’s at this stage that annuity purchase may be the most beneficial for UK DC savers.

Our 2008 research (“Avoiding the Next Pensions Crisis”) suggested that the cost of delaying annuitization to age 75 is minimal. This conclusion is best illustrated by the cost of longevity drag—the increase in cost of an annuity purchased one year later, above the risk-free rate, to reflect the impact of delay. For a typical healthy individual, this incremental cost stays very low until age 75—well below 1%, a return that even the most conservatively invested portfolio can achieve. Consequently, we think the case for purchasing an annuity before this age is weak, especially considering the additional disadvantages resulting from early annuitization: the loss of flexibility in how individuals can access their assets, as well as the absence of important information about financial needs and health, two things that usually only become clear in the early years of retirement.

To help evaluate annuity purchase timing, the Display below models the potential income advantage of a retirement income drawdown portfolio versus a level annuity, based on different assumptions regarding bond yields and excess returns over cash.

When to Annuitize: Investment Opportunity vs. Annuity Cost

Increase in Retirement Income for Different Return and Yield Assumptions

For the lower excess return scenarios, the inflection point is around age 75, with late 70’s for the higher return scenarios.

Past performance does not guarantee future results. For illustrative purposes only.
As of June 30, 2024
Source: CMI and AB

In this analysis, the optimal age to annuitize depends on just two factors: higher return assumptions favour retaining assets in an investment portfolio whereas higher yield assumptions favour considering annuitization.

Ultimately, DC savers’ personal circumstances and tolerance for risk should drive their decision as to whether and when to annuitize, and we believe there’s no one-size-fits-all age that’s definitive. Even so, we think that, in the new investment regime, the probability of achieving a 2% excess return over cash will be much smaller than before, which means that for many members, 75 could be the salient point when the balance of advantage may start to shift in favour of considering annuitization.

How Can UK DC Savers Decide?

Whereas US DC savers can access more sophisticated insurance options that enable them to retain their investment portfolio throughout retirement (for instance, guaranteed lifetime withdrawal benefit insurance), the UK insurance market is more limited. It offers only a binary one-time choice between maintaining control of capital and annuitization. Before making their decision, UK DC savers should therefore carefully consider a range of factors, which include: their other pensions, assets and income streams; personal health circumstances; risk tolerance; and available annuity purchase options—both choice of provider and timing.

We think a reasonable retirement strategy for DC savers is to stay invested in either a lifetime income default fund or an institutional-quality, multi-asset income drawdown product to at least age 75, then to consider annuitizing thereafter. Savers with a low tolerance for longevity risk might annuitize at or shortly after age 75, depending on their circumstances and available annuity terms. Savers with a higher risk tolerance might prefer to stay invested in an appropriate multi-asset income drawdown product until later in life.

This “wait-and-see” strategy of deferring annuitization and then making an informed annuitization decision based on prevailing circumstances potentially provides a dual benefit. Staying invested would likely help to achieve higher returns in the initial post-retirement phase—which would be even more important in a lower-return investment regime. Thereafter, retaining the option to annuitize would be a valuable protection against longevity risk. For this approach, we think it’s not enough for investors to seek out DC retirement-income strategies that offer good value and have a robust investment process. It’s also important to look for providers that have a proven record of maintaining the value of invested capital, such that savers can annuitize later in life on equivalent or better terms than annuitizing early.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

About the Authors

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