Male pensions could be cut by 13%

by Ed Bowsher on 04 February 2011  |  5 comments
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A European court ruling may cut annuity rates for men by 13%.

I’ll be watching the European Court of Justice very closely on March 1st. That’s because the Court will give a ruling on alleged discrimination between the sexes when it comes to pensions.

All other things being equal, men normally get a higher income than women when they buy their pension annuity. This happens because male life expectancy is lower than for women.

However, next month the European Court may rule that bigger annuities for men are a breach of equality laws. Male annuities may fall by as much as 13%, while, according to Citywire, women’s rates would only rise by a small amount.

I don’t know what decision the Court will make in the end. But it’s worrying that the Court is even considering this issue.

Solvency

What’s more, the EU is affecting annuity rates in another way too. New solvency rules for insurance companies are forcing these firms to only purchase low-yielding government bonds to back annuities.

Until now, annuity providers have been able to buy some corporate bonds as well which pay a higher rate.  If an annuity provider owns some corporate bonds alongside some government bonds, it can pay  higher annuity rates, albeit at greater risk.

In fairness, I can understand that the new rules are a response to the financial crisis and an attempt to make sure that large insurance companies don’t go bust. So I can see that the intentions are good – it’s just that once again, ordinary people are being punished for the sins of the City bankers.

Good news

Still it’s not all bad news on the annuity front. I’ve seen some data today from Alexander Forbes Annuity Bureau which shows that annuity rates have risen modestly in both January and February. This rise has been driven by an increase in yields on government bonds. That increase reflects the fact that more people in financial markets now expect inflation to go up over the next few years.

I’m glad that at least one factor is pushing up annuity rates, and in spite of the problems coming from the EU, I still believe that, for most people, annuities are the best way to secure a reliable retirement income.

Should men rush to buy an annuity?

One final point: should men rush to buy an annuity before March 1st in case annuity rates fall?  It’s a tough one to answer. The danger is that some men may end up buying an annuity when they’re too young and feel like a right Charlie if the European Court rules that higher annuities for men can continue.

I’d say that if you were already planning to buy an annuity in 2011, it might be worth buying before March 1st. But if you weren’t planning to buy soon, it’s probably best to hang back and see what happens. Decisions made in a panic often prove to be a mistake. And don’t forget that even if the EU is pushing annuity rates down, rising government bond yields should be pushing annuity rates in the other direction.

Whatever you do, make sure that you shop around when you do decide to buy your annuity!