Men face fall in pension payouts

A SEX discrimination ruling is likely to have a big impact onannuities, says Teresa Hunter.

Still Game's Jack and Victor would have plenty to say if a European Court ruling results in a ban on gender discrimination that ultimately prompts a fall in pension payouts for men

Men who are planning to buy a pension annuity any time soon might be advised to make a move before the European Court puts up the price.

On 1 March, the European Court is to deliver its judgment over sex discrimination when it comes to insurance premiums. Legal opinion to date favours banning the practice of charging men and women different amounts when they buy insurance products.

If the court decides, as is likely, that this practice must be stopped, then it could have far-reaching repercussions for financial planning.

When insurers set premiums for any insurance policy they take a wide range of factors into consideration as they assess the risk. This normally includes age, address and possibly profession.

But for some policies, notably motor, life, health and pensions, gender is also taken into consideration because insurers say they have very different claims experience depending on the sex of the insured.

When it comes to motor insurance, young men cost companies more in claims than young women.

However, the premiums for both are set effectively to keep them off the road. A young man is likely to be asked for more than 1,000, while a young woman will face an annual motor insurance bill of nearly 900.

Similarly, when it comes to buying an annuity, men get bigger pensions because traditionally they were thought to die sooner and therefore cost the company less.

For example, a pension lump sum of 100,000 would buy a 60-year-old man a basic annuity of between 5,300 and 5,800 at the top five companies. Yet for the same pension fund, a woman would only get between 5,000 and 5,500. Typically, the reduction can be in the region of 10 per cent.

European lawyers have decided that this kind of sex discrimination must stop, and the European judgment is due on 1 March.

There are three possible outcomes. The court might rule that gender-based premiums can continue. It might say they must stop immediately. Or it might rule that companies can no longer offer them from a certain date.

The insurance industry is bracing itself for gender-based premiums to be outlawed. It is less certain whether the judgment will take place immediately, or from some date in the future.

Standard Life's John Lawson said: "We have studied previous court rulings, and in about eight out of ten they come into force on the day of the judgment."

If judges ban gender discrimination, annuity payouts for men could fall and those for women could rise. Young women might find their motor premiums rise, as it is unlikely companies will offer cheaper cover to their highest risk: young men.And women may have to pay slightly less for life cover and men pay slightly more.

According to advisers Hargreaves Lansdown, the ruling could wipe hundreds of millions of pounds off the income paid out to UK pension investors. There is even an outside possibility that the court could rule that all existing annuity contracts are covered as well, resulting in millions of pensioners having their retirement income recalculated. However, this outcome is thought to be unlikely.

The latest research from the Association of British Insurers points to a range of possible outcomes, with male annuity rates possibly falling by as much as 13 per cent.

Tom McPhail, head of pensions research at Hargreaves Lansdown, said: "There is mounting concern across the pensions industry that the forthcoming ruling could cause chaos, with annuity rates being withdrawn without notice. I think we're around Defcon 2 at the moment.

"This is a particular issue for men approaching retirement, who may see a sudden cut in their prospective income. Anyone planning on buying an annuity in the next few months might want to get on with it."

However, others think the hysteria over the slashing of men's annuities is overdone, largely because women represent less than 20 per cent of all pensions business.

If they now have to be paid the same as men, an adjustment is likely, but others believe the 10 or 13 per cent cut which some are suggesting is scaremongering.

Billy Burrows, of William Burrows Annuities, said: "I would expect some female rates to go up by about 2 to 3 per cent, and male rates to fall by a similar amount.

"Over time, other factors will come to influence how much pension your savings will buy you, such as your health or profession."

Lawson agrees, and suggests there are other proxies for gender which might help insurers more accurately assess how long someone will live.

"You could offer a special deal to certain professional groupings, such as the Builders' Federation or the Women's Institute. These might have a similar life expectancy, irrelevant of gender," he said.

Even so, with so much uncertainty, should men rush out and secure an annuity today? The consensus is they should think about it. Similarly, women should delay until after the judgment.

Lawson said: "If you have a pot larger than 50,000 and are due to buy annuities in the not too distant future, it would be worth taking some advice about your options."

How to get the best annuity:

1. Time your purchase carefully. The older you are, the more your pension will buy. If you are a man approaching retirement, consider annuitising before 1 March. If you are a woman, leave it until after the judgment has been published.

2. Unless you live in a poor area, avoid having your annuity set by postcode. These give an average annuity rating for your code, irrespective of health or lifestyle issues. If you live in an affluent area, they will cut your pension.

3. If you have any health issues, such as diabetes or high blood pressure, ask for an impaired life annuity. Smokers should opt for a smoker's annuity.

4. Pile on the agony. Unlike other forms of insurance, where being responsible and in good health save you money, with annuities these will cost you. Mention anything which might bring down your life expectancy.

5. Don't forget to build in some protection for inflation..