The following is a guest post.
Act Now To Avoid Annuity Woe
New rules, to be implemented in December by the EU Gender Directive, are set to put pressure on prospective retirees, as pension savings are squeezed by a drop in annuity rates. The changes are prompting many pension holders to scramble to find the best annuity – and optimize their returns – before the rules come into effect. But the details of the changes are complicated – should you be worried about finding the best rate for your future?
The EU Gender Directive, due to commence on 21 December, eliminates gender from the way in which annuities may be calculated. There has always been a gender disparity in annuity rates, with men receiving 4% more than women over the course of their lifetime. The difference stems from the way annuities are worked out by insurance companies: men’s on-average lower life expectancy means that their annuities are paid over a shorter time than women’s – and at a higher rate.
The directive means, going forward, insurance companies must concentrate on medical conditions and employment history to determine the size of payments – the effect of which will see men experience a sharp drop in annuity rates.
The changes leave a lot of men facing the decision to move up their retirement plans and buy their annuity before the rules take effect on December 21. Practically, this means checking the marketplace and finding the best place for your money. In the past, pension holders could ask for frequent updates on their annuity – the looming implementation of the directive increases the urgency of obtaining that information.
There are plenty of factors to take into account: policy holders may be entitled to a guaranteed annuity rate, or terminal bonus, which would offset the drop. Speed is of the essence: some providers may no longer even offer more favourable rates – having chosen to implement the directive early.
It might seem that women will escape the fallout of the annuity shake-up – on paper, the removal of gender calculation means that women’s rates could rise by around 1%. Experts warn, however, that other factors are contributing to the trend of falling annuity rates – and any advantage women have could be wiped out in the coming months. The changes will also affect joint annuity rates – women who are 12 years younger than their partner could face a significant drop in payments.
Shop around for the best rate…
Many employees have confidence in their employers – and that their pension trustees are actively working to secure the best possible rates for them. Increasingly, however, this just isn’t the case – and it falls to employees themselves to shop around for the best rates.
The directive includes an obligation for pension trustees to inform beneficiaries of the possibility of purchasing an enhanced annuity and let them know where to go if they do not provide one – however the rules do not cover every type of occupational pension scheme. Choosing whether to take the annuity offered by a pension provider is a huge decision: figures show employees who search the market are more likely to find a higher annuity rate – and one more suited to their specific retirement needs.
As a pension holder, relying on your own knowledge and ability to read the market and understand the trends is becoming an increasingly valuable skill.
Written by Hal Wightman of Pensions Clarity