Now might be the most terrifying time ever to buy an annuity. Scaremongering over the potentially drastic effects of gender neutral annuity pricing has trapped record numbers of retirees into the worst annuities ever sold as they are 'getting in quick' before the changes are revealed. As the confusion around gender neutral annuities is unravelling the deadline for current rate applications is drawing nearer, but don't panic as it might not be too late if you want to secure the rate that is right for you.
Fresh rules banning insurance companies from applying different charges to men and women from 21 December this year sparked fears men’s rates could tumble by more than 13 per cent, or so the Treasury estimated. This has sparked a ‘mad rush’ to get in before the deadline, leading to providers practically fighting off customers.
Billy Burrows, director at the Better Retirement Group, warns some figures in the industry have been pressurising retirees into rushing into their annuity, drumming up more business in the process. "It is a self fulfilling prophecy," he warns. "This gender issue has been a storm in a teacup, as male rates don't look like they're going to be as bad as people previously thought."
Prudential and Aegon's rates, released earlier this month revealed men would only have around 2 per cent snipped off their annuity rate, while as expected, women will receive a significantly better deal. This should give everyone a reason to calm down, but these rates are not considered ‘competitive’. So while the rest of the market is expected to roughly follow suit, everyone is waiting with bated breath to see what Aviva offers on 30 November as it is likely to be more representative of the market as a whole. But even then it would be dangerous to make assumptions.
However the new rates pan out, advisers say current rates have been artificially lowered by the boom in people buying annuities, allowing providers to discreetly reduce them, giving retirees a worse deal. Well over 100,000 annuities were sold in the second quarter of this year and providers are boasting that sales have rocketed to new heights in the period since then, meaning if this theory is true, it might be better to hold off until the rush is over. But this is an extremely risky business and before making any moves, you need to weigh up all your options.
What are the annuity providers doing?
To add some more confusion to the mix, not all providers are doing the same thing. This means how soon you can get your application and funds ready may govern which provider you go with. Prudential, Aviva and Canada Life have decided to adopt the new gender neutral rates early. Meanwhile, others are taking applications right up until the day before the deadline (20 December), with LV, Just Retirement, L&G and Partnership offering specially extended guarantees which mean the funds won’t have to be transferred until early February in some cases. Adrian Boulding, pensions strategy director at Legal & General, told Investors Chronicle the decision to give people more time is so savers can wait until after Christmas before transferring funds.
Why are the rules changing and what does it mean?
The Gender Directive means a person's sex can no longer be used as a discriminating factor to allow insurers to charge different people different rates. Historically, gender has been used by insurers to price policies to reflect individual risk more accurately, but The Court of Justice of the European Union has now ruled against this. It means all UK insurers must change their insurance rates. It therefore applies to all types of cover, including car insurance, health insurance, life insurance and annuities - and it will officially come into force on 21 December.
Because on average women live a few years longer than men, they currently get worse annuity rates. But under the new rules, the playing field will be levelled so they get the same. For men this means a worse deal, while for women it means they will be richer in retirement.
This should make things simpler, but for retirees looking for an annuity in the next month it will make shopping around somewhat trickier. Hunting for the best deal is already a complicated business, but with providers’ changing gender neutral rates to consider as well, more care is needed before making a final decision.
What should I do?
Uncertainty over future pricing is making it difficult for financial planners to advise on annuities, but the general advice is if you weren’t planning on annuitizing within the next six months, don’t make any attempts to beat the rush and get in at the current rates. But if you were planning on annuitizing within two months, Patrick Connolly, financial planner at AWD Chase De Vere says the trade off between certainty and uncertainty is “dangerous” so you should at least consider getting your act together before the deadlines.
With all the rush and confusion surrounding gender neutral pricing, it’s important not to forget to apply for an enhanced annuity. If you’re using an adviser they should take you through the process, but if you’re unadvised it could be easy to neglect. An estimated 70 per cent of retirees are eligible for some form of enhanced annuity, which could fetch you up to 60 per cent more per year in retirement, meaning your health could have a far greater effect on your retirement income than your gender.
Men planning on annuitizing in the next two months are being urged to get their forms in before the deadline. This is because the Gender Directive will reduce men’s rates after 21 December and because annuity rates in general are showing no signs of increasing.
The advice for women is more complicated but because their rates are expected to increase significantly many are being advised to wait. By waiting they could avoid the artificially low rates potentially caused by the current rush, but they do risk rates falling further due to low gilt yields.
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