Pension rule change could harm women

I'm looking forward to merging my two self-invested personal pensions (Sipps) into one. Why two Sipps? you may ask.

Well, back in 2009, I decided to transfer my collection of occupational pensions from previous employers into a Sipp. They had been performing pretty miserably, with a couple only just breaking even over 10 years. So I thought I could do better managing the investments myself in a Sipp.

One of these old pensions was 'protected rights'. This term refers to a type of pension fund built up by money paid by the government to anyone who has 'contracted out' of the state second pension, commonly known as S2P and previously Serps.

Because of the restrictions imposed by the government on how protected rights money could be used, pensions administrators such as insurance companies and Sipp providers have had to segregate protected rights pensions, keeping the money separate from voluntary contributions made by individuals and their employers.

Those restrictions have now been lifted (as of 6 April 2012). So from now on I will have less paperwork to deal with and will be able to view my Sipp as one pot (although not all companies will merge protected rights and non-protected rights straight away).

When it comes to retirement I will no longer be required to purchase a joint life annuity with inflation-proofing (the previous requirement). If I so wish, I will be able to leave my husband to his own resources and get a higher initial income via a level annuity.

While I'm all for extra choice around my hard-earned pension savings, I feel terrible for the vast numbers of women who may now be forgotten by their husbands.

There is already a pensions crisis for women and this protected rights rule change could make things worse. A study by Prudential's Class of 2012 shows women are more than twice as likely as men to have no pension – 20 per cent of women retiring in 2012 will depend on the state pension compared with just 8 per cent of men.

It is common for married men to buy single life annuities at retirement because of their higher initial income rates, leaving their spouses with nothing when they die. Hargreaves Lansdown says nearly two out of three annuities are set up on a single life basis. According to the firm's annuity tables, a 65-year-old man with a pension fund of £100,000 could buy a single life level annuity of £6,005 a year. However, if he wants his wife aged 62 to have half of his pension when he dies and wants the income to rise by 3 per cent a year, he would only be able to buy an annuity that starts at £3,642.

While the first option may seem like a better deal, let's see how the two scenarios pan out based on average life expectancies and 3 per cent inflation over the period.

According to the GAD interim life tables for England, a man aged 65 can expect to live on average 18 years (until he is 83). If he has a wife aged 62, she can expect to live 23 years (until she is 85).

Based on these life expectancies, if our husband opts for a single life annuity his wife will be without private pension for five years in her 80s, not a comfortable prospect. Factor in the average annual inflation of 3 per cent over 18 years and his £6,005 pension will dwindle in value to be worth £3,470 the year he dies.

Meanwhile, the alternative £3,642 joint life annuity escalating at 3 per cent a year would have grown to £6,200, meaning his wife would be left with £3,100 private pension income.

While everyone's circumstances will differ – and some pensions investors may qualify for enhanced annuities based on lifestyle and health factors – choosing the single life annuity may not be the good deal it appears to be.

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