Women to benefit from pension increase
Women will benefit from an increase in the amount they can withdraw from their pension in retirement each year when an European Union (EU) gender neutral law comes into force in December.
HM Revenue & Customs recently confirmed that the EU ruling, which makes it illegal for insurers to use gender as one of the risk factors when determining pricing, will apply to capped withdrawals in income drawdown, in addition to annuities.
Currently maximum income rates are calculated using two tables, one for males and one for females, which looks at life expectancy, size of pension and also the gilt yield. But on 21 December the female table will be withdrawn and all capped rates will be based on the male life expectancy rates.
As men tend to have a lower life expectancy than women, the amount of income men can withdraw from their pension has tended to be higher than for women. According to Skandia the change will mean women could receive around 8% more money from their pension each year.
Under the current rules and based on a £100,000 pension and a 2% gilt yield, a 65-year-old woman would be allowed to take around £4,900 a year from her pension. But based on the male life expectancy rates, this figure would rise to £5,300.
It is still unknown how annuities will change under the EU rules. Women's annuities could become more generous if they match or meet halfway with men's annuities, or insurers may choose to lower male rates so they match female rates.
Adrian Walker, Skandia's pension expert, says women already taking a capped income will be able to benefit from the rule change at their next review period.
"Females approaching retirement today, and considering capped income, should ensure they choose a provider with flexible review periods, or hold back some pension money to top up their drawdown fund after 21 December, so the entire income amount is recalculated to benefit from the rule change," he comments.
This article was written for our sister website Money Observer
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
An alternative to an annuity, income drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and so continues to benefit from any fund growth. The drawdown of income has to be calculated carefully as taking too much income could exhaust the pension fund so experts say the annual drawdown must not exceed what the assets would normally yield in an average year. The invested pension fund could also be hit by market turbulence and the value of the assets could fall.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.