The next phase of the
long running saga introducing gender neutral annuity rates is fast
approaching. But the position is far from certain with many complexities sure
to exist after the changes take place. All of which means there are many issues
for advisers to take into account when advising clients both before and after
21 December 2012.
While many may disagree
with the European Court of Justice (ECJ) decision, the headline change to treat
men and women the same sounds relatively straightforward. But, as with all
pension changes, things are more complex than they first appear. This change will
affect different contracts in different ways, and cause confusion for
customers.
Standard annuities
Rather than having
different rates for males and females, standard annuities will have one gender
neutral rate from 21 December 2012. This is likely to mean male rates fall 3%
to 4% and female rates edge up slightly by 1% or 2%. Therefore male clients
wanting to buy an annuity may believe it is sensible to do it before December.
However buying an annuity solely because of the gender changes may not be the
right decision. Rates could, after all, spike up in future due to gilt yield
rises or competitive pricing.
Somewhat bizarrely,
standard annuities bought by those in occupational pension schemes (OPS)
are not affected by this ruling. As the Treasury has chosen not to ‘gold plate'
the EU legislation to incorporate OPS, it appears this is a position we will
have to live with - at least until a further case is taken to the ECJ. Advisers
will have to take this into account as part of their advice process after 21
December. For example, a female in an OPS may benefit by transferring to a
personal pension before buying an annuity as they will move to gender neutral
rates.
Enhanced annuities
Underwritten annuities
may not be affected to such a degree as standard annuities. This is because the
risk assessment element of pricing takes into account a whole range
of factors - such as health, lifestyle, occupation and postcode - not just
gender. So while there may be some tweaks to pricing, rates may not move across
the board in the same manner.
Income drawdown
Currently there are
different Government Actuary Department (GAD) tables for male and female
drawdown customers, but this would breach the new rules. This put HM Revenue
and Customs in an awkward position as it needed to give providers new
GAD tables in sufficient time for system changes to take place. However GAD
rates are based on market annuity rates and we don't know what gender neutral
rates will be until after 21 December - and realistically it will probably be a
few months later until rates settle down.
So, from 21 December
everyone will use what are currently the male GAD tables, which is a pragmatic
solution. This means females who take out new drawdown contracts from 21
December will be able to take a higher income than would otherwise have been
the case. For drawdown arrangements already in place a similar increase may
kick in at the next review or an earlier date if there is some other change
which means income needs to be re-calculated (such as additional funds being
designated to drawdown). The extra income available depends on age but it is
approximately 4% more for a 60-year-old and 8% more for a 75-year-old. There is
no change for males.
HMRC will review the
situation once it becomes clear how the gender changes are affecting market
annuity rates. As this is likely to be a temporary solution, advisers may want
to provoke a drawdown review for their female clients to lock in a new higher
income for the following three years. However, as many other factors such as
fund value and gilt yield affect this calculation, care needs to be taken. In
some cases income may fall despite the male GAD rate being used.
Andrew Tully, Pensions Technical Director
(First appeared IFAonline.co.uk 25th Sept 2012)
