A massive pension dilemma for men

by Ed Bowsher on 03 March 2011  |  7 comments
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This week's bizarre European Court ruling on the insurance industry means that men should consider buying an annuity sooner rather than later.

I’ve been thinking some more about some of the implications of this week’s bizarre European Court ruling on insurance. You can read more about the ruling in Political correctness gone mad and Insurance rates to soar for women.

I think the most significant aspect of the judgement is its impact on annuities. From December 2012, men will get a lower income than before when they buy an annuity. There’s some confusion about how large the reduction will be, but it will probably be significant.

So that raises the question. Should men who are over-55 get cracking and buy an annuity before the December 2012 deadline?

Reasons to delay

Let’s start with the reasons to delay:

-          There’s a good chance that yields on government bonds (gilts) will rise over the next few years. That’s because many people expect inflation to rise. Gilt yields are one of the two main determinants for annuity rates, so a rise in gilt yields could deliver a significant boost to annuity rates.

-          The longer you delay, the older you’ll be when buy your annuity. Older people get higher annuity rates than younger folk.

-          If you delay till you’re older, you’ll be more likely to be suffering from a health problem when you come to buy an annuity. If you have a health problem you can buy an enhanced annuity and get a better income that way.

-          Rushing into decisions due to a tax change or a change in the law is often a mistake. One could say 'buy an annuity in haste, repent until you die.'   I think this is especially true for men who are in their late 50s and still working. You’ll get a very low annuity rate at that age. If you can lead a reasonable lifestyle on your salary, it probably makes sense to defer buying your annuity until a later date

-          The stock market is more likely to rise than fall. Currently the FTSE-100 stands at around 6000 points. In five years’ time, it might have reached 8000 points. If that were the case, your pension pot would probably be larger than it is now. All other things being equal, a bigger pot should enable you to purchase a bigger annuity

Reasons to buy now

But there are some good arguments for buying now:

-          There’s no question that the European Court ruling will exert downward pressure on male annuity rates. We just don’t know how much, and whether rising gilt yields will cancel out that downward pressure.

-          Rising life expectancy. Longer life expectancy has been a major factor driving down annuity rates over the last 20 years. Life expectancy will inevitably keep rising and that will be another downward pressure on annuity rates. What’s more, I’m told that some of the insurance companies haven’t properly factored rising life expectancy into their calculations when they work out annuity rates. I can’t say for certain that’s true, but if it is, it’s another reason  for a man to buy an annuity sooner rather than later.

Compromise

If you’re still not sure whether to buy or wait, you have a couple of other options. Firstly, you could buy a short-term annuity.  Basically, you use some of your pension pot to buy an annuity for the next few years. Then you can use the rest of your pot to buy a lifetime annuity when your short-term annuity expires. Find out more in Why thinking short-term can boost your pension!

Or you could never buy an annuity at all and access your pension pot via income drawdown. You’re no longer obliged to buy an annuity if you reach 75 without one. However, going down this route means you're at risk of running out of money before you die.

Beyond 2012

There’s one other factor to consider. How might the annuity industry change from 2013 onwards?

I suspect that there’s going to be a greater emphasis on enhanced annuities. If insurers can’t distinguish between people on grounds of gender, they’ll be all the keener to look at factors such as occupation, weight, smoking and other health issues. So we may find that the current differential between smokers and non-smokers will rise. In other words, smokers may get even larger annuities compared to non-smokers than they do now.

No firm answer

As you can see, I’ve not given a firm answer on what men should do. That’s because everyone’s circumstances and attitudes to risk differ. Buying an annuity is an extremely important financial decision and if you’re not sure what to do, I’d urge you to visit an IFA or consult an annuity specialist such as Annuity Direct or Hargreaves Lansdown.

More:  How to buy the right annuity