By Neil Faulkner
In light of a recent European Court ruling, both men and women need to re-think how and when they retire.
From 21 December 2012, men who cash in their pension pots could get lower rates of income, and women may get more. (Find out why this is happening in our ECJ ruling round-up.)
After paying into your pension throughout your life, when you come to retire you can cash in your retirement pot to buy an annuity – a guaranteed income for the rest of your life. Currently, men can expect to get more than women because they don't live as long, on average, so their annuities don’t have to pay out for as long.
A healthy, 65-year-old male trading in a £100,000 pension pot for an annuity can expect to get around £6,000 per year – on top of his state pension and other benefits. A woman could expect around £400 less per year, if you take rates paid by Legal & General rates as an example.
Enter the European Court of Justice
Due to a recent court decision in Europe, this will have to change. Each insurer will have to offer the same annuity rates to men and women.
This is a particularly important time for workers currently in their 50s and 60s. Many are able to claim private pension benefits from the age of 55 but choose to wait and let their pensions grow further, even though they could cash them in while they're still working. Hence, some older workers need to consider their options.
Let's get some perspective
This ruling has caused some anger from commentators, but if we get past the hysteria, men probably won't have to take such a big hit.
Since women have saved less for their pensions, about 30 per cent less, according to Scottish Widows, it’s likely that a man’s annuity could come down but some quarters of the industry are not expecting a man’s annuity to be reduced by more than £100 to £150 per year, for a pension pot of £100,000. Women could see an increase of £250-£300 a year paid to them by their annuity, but again these are estimates and it’s still very much up in the air exactly what the pay-outs will look like after the ruling takes effect.
That is assuming the industry doesn't just level downwards and take the rest as profit.
It is not that simple
It would seem logical, then, that men claim their benefits before Christmas 2012 and women wait till afterwards, but annuities are rather complicated. As time goes by, insurers increase their forecasts for our life expectancies and reduce incomes for new annuity customers. If you wait a year and in between insurers add two years to our life expectancies, you will have lost out.
To add a basket-load more complexity, annuity rates can also be affected quite dramatically by inflation and inflation expectations. When inflation is high and expected to remain so, such as in the last couple of years due to low interest rates and money printing, annuity rates usually fall. And they have fallen a lot. The problem is that there is no reliable way to forecast inflation.
There are other advantages to waiting. If you still have your pension pot and haven't traded it in for an annuity, you can pass it on to your dependants if you die early. Once you trade it in for an annuity, your beneficiaries won't be able to get a penny of it.
Furthermore, it's believed the present government might get around to making annuities more flexible but you're not likely to benefit from that if you cash in your pot for an annuity now.
Some important things to do
You can get yourself a better deal shopping around for annuities, like you can for other essentials like car insurance, home insurance for example. Don't just accept the annuity your pension provider offers you, shopping around and comparing annuities can make a big difference to your income in retirement. You could also consider income drawdown as a more flexible – albeit more risky – alternative to an annuity.
