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| Retiring? It'll pay to check the new annuity rules first | Retiring? It'll pay to check the new annuity rules first |
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| Are you aged 55 or more and planning to retire in the near future? Then you need to get your skates on because new rules to be implemented in December could mean you receive less retirement income from your pension savings. | Are you aged 55 or more and planning to retire in the near future? Then you need to get your skates on because new rules to be implemented in December could mean you receive less retirement income from your pension savings. |
| Until now, men have on average received about 4% more income from their annuities than women, because women tend to live longer. But the EU gender directive, which comes into force on 21 December, will stop insurance companies using the sex of a pension policyholder to determine the income the policyholder receives when they cash in their savings and buy an annuity. Insurers have said they will rely more heavily on other criteria, to underwrite annuities, including the type of work a policyholder has done and whether they suffer certain medical conditions. | Until now, men have on average received about 4% more income from their annuities than women, because women tend to live longer. But the EU gender directive, which comes into force on 21 December, will stop insurance companies using the sex of a pension policyholder to determine the income the policyholder receives when they cash in their savings and buy an annuity. Insurers have said they will rely more heavily on other criteria, to underwrite annuities, including the type of work a policyholder has done and whether they suffer certain medical conditions. |
| For men, the move means a sharp drop in annuity rates, building on a gradual decline over the past few years. Carl Lamb, managing director of Norwich-based independent financial adviser Almary Green, says this means that men planning to draw their retirement income in the near future should consider bringing their plans forward to take advantage of differential rates and secure a higher income. "Ideally, they should ask for a quote now, then repeat that process every 14 days," he says. "If they see the rate they are offered beginning to fall, it's a sign they should act very quickly to buy their annuity." | For men, the move means a sharp drop in annuity rates, building on a gradual decline over the past few years. Carl Lamb, managing director of Norwich-based independent financial adviser Almary Green, says this means that men planning to draw their retirement income in the near future should consider bringing their plans forward to take advantage of differential rates and secure a higher income. "Ideally, they should ask for a quote now, then repeat that process every 14 days," he says. "If they see the rate they are offered beginning to fall, it's a sign they should act very quickly to buy their annuity." |
| However, Bob Bullivant of retirement specialist Annuity Direct, recommends investors ask an independent financial adviser to first check the terms of their pension: "Look at your scheme to see if you are due a terminal bonus or are eligible for a guaranteed annuity rate. You would not want to give up those benefits just to get a gender-specific rate." | However, Bob Bullivant of retirement specialist Annuity Direct, recommends investors ask an independent financial adviser to first check the terms of their pension: "Look at your scheme to see if you are due a terminal bonus or are eligible for a guaranteed annuity rate. You would not want to give up those benefits just to get a gender-specific rate." |
| Women may do slightly better to wait until after implementation of the rules because their rates are expected to increase by about 1%. But other factors have caused rates to fall in the past few weeks, says Bullivant, and there is no sign of that reversing. "Any advantage they could get from the gender directive could be wiped out by a fall in annuity rates over the next six weeks," he adds. | Women may do slightly better to wait until after implementation of the rules because their rates are expected to increase by about 1%. But other factors have caused rates to fall in the past few weeks, says Bullivant, and there is no sign of that reversing. "Any advantage they could get from the gender directive could be wiped out by a fall in annuity rates over the next six weeks," he adds. |
| The move will also affect joint annuity rates – insurance contracts that continue to pay an income to the surviving partner after the first one has died – but this will vary depending on the comparative age of the partners. For a couple with a pension pot of £129,000 buying a level annuity, Legal & General will currently pay £5,955 a year where the man is 65 and the woman 62, based on the surviving spouse continuing to receive 100% of the pension income after their partner's death. But if the woman is 12 years younger, this drops to £5,439 a year. | The move will also affect joint annuity rates – insurance contracts that continue to pay an income to the surviving partner after the first one has died – but this will vary depending on the comparative age of the partners. For a couple with a pension pot of £129,000 buying a level annuity, Legal & General will currently pay £5,955 a year where the man is 65 and the woman 62, based on the surviving spouse continuing to receive 100% of the pension income after their partner's death. But if the woman is 12 years younger, this drops to £5,439 a year. |
| Shopping around | Shopping around |
| Annuity Direct says 85% of its clients end up with a better income by shopping around rather than buying an annuity from their pension provider. Pensioners can get a much higher income if they suffer from particular medical conditions, entitling them to buy an "enhanced" or "impaired life" annuity from a specialist provider such as Partnership or Just Retirement. Bullivant says shopping around has achieved incomes on average 20% higher than those offered by the incumbent providers. | Annuity Direct says 85% of its clients end up with a better income by shopping around rather than buying an annuity from their pension provider. Pensioners can get a much higher income if they suffer from particular medical conditions, entitling them to buy an "enhanced" or "impaired life" annuity from a specialist provider such as Partnership or Just Retirement. Bullivant says shopping around has achieved incomes on average 20% higher than those offered by the incumbent providers. |
| Some insurers plan to stop using gender in their pricing calculations before the rules come into force: the Prudential will switch on 12 November, while Aviva is expected to adopt unisex rates ahead of 21 December. The Prudential pays low annuity rates compared with other companies and Bullivant says its early move to stop using gender for underwriting makes it even more vital that all people with a Prudential pension shop around. | Some insurers plan to stop using gender in their pricing calculations before the rules come into force: the Prudential will switch on 12 November, while Aviva is expected to adopt unisex rates ahead of 21 December. The Prudential pays low annuity rates compared with other companies and Bullivant says its early move to stop using gender for underwriting makes it even more vital that all people with a Prudential pension shop around. |
| Under recent rules, pension providers are now required to identify whether a client could qualify for an enhanced annuity, and tell them where to buy one if they do not provide this product. However, these rules to not extend to members of certain occupational schemes – group personal pensions and defined contribution schemes set up in trust. If you are a member of this type of scheme, the provider has no obligation to offer you anything but its own annuities. | Under recent rules, pension providers are now required to identify whether a client could qualify for an enhanced annuity, and tell them where to buy one if they do not provide this product. However, these rules to not extend to members of certain occupational schemes – group personal pensions and defined contribution schemes set up in trust. If you are a member of this type of scheme, the provider has no obligation to offer you anything but its own annuities. |
| Lamb was recently approached by a member of a defined contribution scheme, the trustees of which use one of Britain's biggest independent financial advisers to handle the sale of annuities. The member had built up a fund of £129,000, but was offered standard illustrations based on single and joint life annuities, with either a nil or five-year guarantee attached. Lamb says: "No advice was provided, and the client was effectively given a menu to choose from. We ascertained that he was eligible for a enhanced annuity due to medical issues – he has diabetes – which lifted his annuity income by 15%." | Lamb was recently approached by a member of a defined contribution scheme, the trustees of which use one of Britain's biggest independent financial advisers to handle the sale of annuities. The member had built up a fund of £129,000, but was offered standard illustrations based on single and joint life annuities, with either a nil or five-year guarantee attached. Lamb says: "No advice was provided, and the client was effectively given a menu to choose from. We ascertained that he was eligible for a enhanced annuity due to medical issues – he has diabetes – which lifted his annuity income by 15%." |
| Time frame | Time frame |
| Alan Higham, chairman of Annuity Direct, says it can take between two and four weeks to research someone's pension scheme and decide whether it is appropriate for the policyholder to consider cashing in their fund. Quotations for annuity rates then typically last for 14 days before expiring. | Alan Higham, chairman of Annuity Direct, says it can take between two and four weeks to research someone's pension scheme and decide whether it is appropriate for the policyholder to consider cashing in their fund. Quotations for annuity rates then typically last for 14 days before expiring. |
| If the policyholder decides to go ahead and buy the annuity, the purchase can take anything from 10 days for Standard Life and Legal & General, to two or three months with the likes of Abbey Life. | If the policyholder decides to go ahead and buy the annuity, the purchase can take anything from 10 days for Standard Life and Legal & General, to two or three months with the likes of Abbey Life. |
| Nick Bamford, of chartered financial planner Informed Choice, says that many providers guarantee the rate offered for up to a month once an application has been submitted. | Nick Bamford, of chartered financial planner Informed Choice, says that many providers guarantee the rate offered for up to a month once an application has been submitted. |
| "Some enhanced annuity providers will pro-actively tell us when rates are about to change, so we can request a new quote on the existing rate and extend the guarantee period for as long as possible," he adds. "Regardless of the policies of different providers for holding rates, it makes sense to be ready to accept an annuity quotation very quickly once you start the process." | "Some enhanced annuity providers will pro-actively tell us when rates are about to change, so we can request a new quote on the existing rate and extend the guarantee period for as long as possible," he adds. "Regardless of the policies of different providers for holding rates, it makes sense to be ready to accept an annuity quotation very quickly once you start the process." |
| Men wanting to take advantage of the differential rates available before 21 December should bear in mind that the Christmas holidays will reduce whatever guarantee period your chosen annuity provider offers. | Men wanting to take advantage of the differential rates available before 21 December should bear in mind that the Christmas holidays will reduce whatever guarantee period your chosen annuity provider offers. |
| YOUR OPTIONS | YOUR OPTIONS |
| There are several options to consider when buying an annuity: these will affect the income you and your spouse will receive for the rest of your lives: | There are several options to consider when buying an annuity: these will affect the income you and your spouse will receive for the rest of your lives: |
| ■ Single or joint life: you can choose between a policy that simply pays an income during your lifetime, or continues to pay out to your spouse or partner after your death. | ■ Single or joint life: you can choose between a policy that simply pays an income during your lifetime, or continues to pay out to your spouse or partner after your death. |
| ■ Level: an annuity that pays the same fixed amount every year. | ■ Level: an annuity that pays the same fixed amount every year. |
| ■Escalating: an annuity that rises every year, either in line with inflation or a set percentage, typically 3% | ■Escalating: an annuity that rises every year, either in line with inflation or a set percentage, typically 3% |
| ■ Investment-linked: an annuity that makes payments at a level that changes depending on the performance of various underlying financial investments. If these financial investments perform well, then your pension income is boosted. But your income could go down if the investments fall in value. | ■ Investment-linked: an annuity that makes payments at a level that changes depending on the performance of various underlying financial investments. If these financial investments perform well, then your pension income is boosted. But your income could go down if the investments fall in value. |
| ■ Smoker: the detrimental effects of smoking on health mean smokers get a higher annuity rate than non-smokers. | |
| ■ No guarantee: your income dies with you (unless you have a joint-life annuity). | ■ No guarantee: your income dies with you (unless you have a joint-life annuity). |
| ■ Five- or 10-year guarantee: if you die soon after retiring, your estate will continue to get your full income for five or 10 years after you retire. | ■ Five- or 10-year guarantee: if you die soon after retiring, your estate will continue to get your full income for five or 10 years after you retire. |
| ■ Enhanced/impaired: some providers will pay a higher income if your lifestyle, previous occupation, or illnesses or conditions are likely to mean you have shorter life expectancy. | ■ Enhanced/impaired: some providers will pay a higher income if your lifestyle, previous occupation, or illnesses or conditions are likely to mean you have shorter life expectancy. |
| The simplest annuity - a single life, level contract - will generally pay the highest income (unless you are in poor health, when you should consider an impaired life annuity). However, it will leave your spouse, partner or any other dependants without income after you die. The value of the income will also be eroded by inflation. | The simplest annuity - a single life, level contract - will generally pay the highest income (unless you are in poor health, when you should consider an impaired life annuity). However, it will leave your spouse, partner or any other dependants without income after you die. The value of the income will also be eroded by inflation. |
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