Buying an annuity? You need to act now!
Guest blogger Tom McPhail of Hargreaves Lansdown looks at why the incoming Gender Directive means time is of the essence if you want to buy an annuity.
A rule change which will affect millions of pension investors will come into force on 21st December.
But if you want to beat the deadline you need to act now, otherwise you could end up missing out on hundreds or even thousands of pounds of extra income in retirement.
The Gender Directive
The rule change is called the Gender Directive, a piece of European legislation which means that insurance companies are no longer allowed to use your gender in determining the price of insurance. This includes a wide range of insurances including car insurance, life insurance and, perhaps most significantly, pension annuities.
Pension annuities, which pay you a guaranteed income for life, are unique in that once set up, you are locked in for the rest of your life. Unlike most insurances you don’t ever get a chance to switch or review at the anniversary of the policy.
This is both good and bad.
The good news is that you get the peace of mind and certainty of knowing that you have a secure income for the rest of your life. The bad news is that you hand over that pot of money which you spent decades saving up in your pension plan and you never get to see it again.
What’s more, most people only ever buy one annuity (unless you have lots of different pension pots) so you only get one chance to get it right. This means that for most people the process of buying an annuity is both an unfamiliar one, and one which they cannot afford to get wrong. All the more reason to research it as thoroughly as you can before committing yourself.
Rounding up or down
On average, men don’t live as long as women. In spite of the fact that this is a fairly well-established and recognised biological phenomenon (though not it seems if you are a European regulator), from 21st December this year, insurance companies will have to price their insurances on the same basis for both men and women.
At present men tend to receive more generous annuity rates. This is because the insurance company knows that on average it won’t have to pay out an income for quite so long for a man as it would for a woman and so it can afford to pay the man slightly more every month.
This means that for men, on 21st December, annuity rates will drop, typically by between 3% and 8%, but in extreme cases it could be as much as 13%. We don’t expect there to be an equal increase in women’s rates as insurance companies will wait and see how the new rates affect their new business turnover.
We also expect that there will be considerable volatility in annuity rates in the first few weeks after the new rules come into effect. Even a drop of 5% could mean hundreds of pounds less income every year for the rest of your life.
Expect an overnight drop
As far as we can tell from talking to insurance companies, they will continue to price annuities on a gender specific basis right up to midnight on 20th December. So we expect to see an overnight drop.
One or two insurance companies have promised to hold their rates on a ‘gender specific’ basis provided you get the application form to them by 20th December. Others have said that you must have competed the transaction and got the money across to them by then; the Prudential has even gone so far as announcing that it will switch to gender neutral pricing from 12th November.
You need to move now
It takes time to set up an annuity. You have to search the market, work out what type of annuity you want to buy – you can use an annuity search engine to help you narrow down your options and find the best rate. You also need to arrange for the transfer of your pension pot to the annuity company and deal with any queries or problems that might arise.
Typically the whole process takes weeks, sometimes even months to complete.
Because the process is relatively slow, anyone who is planning on buying an annuity in the near future, particularly if they are a man, should act immediately to give themselves as much time as possible to complete their annuity purchase ahead of the deadline on 21st December.
One final thought. For most people, buying an annuity for their retirement income makes sense as it removes any risks regarding future investment returns and trying to manage an investment pot when you don’t know how long you’ll live. Having said that, annuity rates have fallen relentlessly in recent years and it may be that at some point they will bounce back.
The problem is we don’t know for sure that they will rise or how long you might have to wait before that happens; it could be six months or it could be ten years.
Tom McPhail is head of pensions research at Hargreaves Lansdown
What do you think? Are you about to buy an annuity? Have you been pushed into buying one now because of the Gender Directive? Is it right that gender no longer plays a part in the pricing of insurance? Let us know your thoughts via the comment box below.