Jeff Salway: Equality rules will cut men’s pensions
TIME is running out for men nearing retirement to avoid being hit by new rules reducing the income they can get from their pension savings.
In just over a month’s time, financial services companies will be banned from using gender in setting their prices for products – and men buying annuities will lose out as a result.
The ban, which comes into force on 21 December, arises from a European Court of Justice ruling and affects products including life insurance, car insurance and annuities.
As far as pension incomes are concerned, men will be hit hardest because their lower average life span means they’re currently offered more generous annuities than women. Men could see annuity rates plunge by as much as 13 per cent, experts have warned.
Some insurers have already adopted the gender-neutral approach. Last week, Prudential became the first UK insurer to quote the same rates for men and women, while Aviva, Legal & General and Canada Life will also switch to unisex annuity rates over the coming weeks.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “Prudential’s new gender-neutral rates have largely gravitated up towards the old male rates, rather than down towards the female rates.
“This means that women are getting a significantly better deal from the Pru than they would have done last week. Men are getting a marginally worse deal.”
So while women have little to gain from annuitising before 21 December, time is of the essence for men on the brink of retirement.
“For men, the message is clear: if you’re planning on buying an annuity in the near future then you need to get on with it immediately,” said McPhail.
The problem is exacerbated by a dramatic decline in the income paid by annuities in recent months, putting them on track for the biggest annual fall in a decade.
The average standard annuity rate for a 65-year-old male is 8.6 per cent lower now than at the start of 2012, according to Moneyfacts.
This alarming trend is blamed largely on quantitative easing (QE), which has driven gilt prices up and sent yields, which are used as the basis of annuity pricing, in the opposite direction.
This is set to be the fifth successive year of declining annuity values, and with the long-term trend a downwards one, those nearing retirement face some tough choices (if you’re not among the minority going into income drawdown, where you remain invested and take income from your pension fund).
The dilemma of waiting until rates improve or annuitising now is a tricky one. For men, the gender ruling makes the latter the more likely option, and with evidence suggesting annuity rates will continue falling, anyone delaying is taking a risk.
Richard Eagling, head of pensions at Moneyfacts, said: “Those approaching retirement are often urged to delay annuitising until annuity rates improve, but the findings of our report show that annuity rates have only increased in three out of the last 18 calendar years.”
Yet now isn’t the time to buy a lifetime conventional annuity (the most popular option), said Brian Steeples, managing director of The Turris Partnership in Glasgow. “They provide certainty of income, but the problem is that at present you are locking in a lifetime of income at an extremely low rate,” he said. “This is to be avoided.”
Here are a few considerations to bear in mind when deciding what to do:
• Shop around: don’t accept your pension provider’s annuity offer without checking first if you can get a better deal elsewhere, using the “open market option”.
With the best annuities on the market paying around 20 per cent more income than the worst, failure to shop around could leave you out of pocket in retirement. If you smoke or you’re in ill health, you can boost your pension income further by opting for an enhanced annuity, which should pay out more on the basis that your life expectancy is below average.
You can search the market at http://pluto.moneyadviceservice.org.uk/annuities.
• Think temporary: fixed term or temporary annuities can be bought for specific periods, often five or ten years. These offer a guaranteed income without having to tie in for life, providing greater flexibility.
However, it’s also a bet that rates will be no lower in five or ten years, said Steeples. “In theory these are sensible things to consider, given future interest rates and annuity rates could be higher than at present,” he said. “But the returns for these short terms are extremely poor, and indeed less than cash returns.”
• Rising prices protection: inflation is the greatest single threat to the fixed incomes on which retirees depend. Annuities can be bought that rise in line with inflation, providing protection against value erosion.
Yet while many advisers believe they’re the best option for most retirees, people are deterred by the fact that they involve taking a lower initial income in return for income that later rises with inflation.
• With-profits, with options: Steeples is an advocate of taking with-profits annuities that have in-built conversion options allowing a switch in future to a conventional lifetime annuity.
“In practice, the with-profit annuity allows you to receive annuity income now but with a ‘second bite at the annuity market’, when annuity rates may be at a more favourable level,” Steeples said.
YOU’RE not obliged to use all your pension fund at once. Many experts recommend phasing your annuity purchase, perhaps by using some of your savings to buy an annuity now and setting some aside to buy another one at a later date.
For all the many permutations and dilemmas, one thing is clear: independent financial advice is well worth paying for when it comes to making an informed decision on your retirement income.
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