EU gender directive: Act now if you are about to draw a pension

By Tom McPhail

A rule change which will affect millions of pension investors will come into force on 21st December, but if you want to beat the deadline you need to act now, otherwise you could end up missing out on hundreds or even thousands of pounds of extra income in retirement.

The rule change is called the Gender Directive, it is a piece of European legislation which means that insurance companies are no longer allowed to use your gender in determining the price of insurance.

This includes a wide range of insurances including car insurance, life insurance and perhaps most significantly, pension annuities.

Pension annuities, which pay you a guaranteed income for life, are unique in that once set up, you are locked in for the rest of your life; unlike most insurances you don’t ever get a chance to switch or review at the anniversary of the policy. In addition, most people only ever buy one annuity (unless you have lots of different pension pots) so you only get one chance to get it right.

On average, men don’t live as long as women. In spite of the fact that this is a fairly well-established and recognised biological phenomenon, from 21st December this year, insurance companies will have to price their insurances on the same basis for both men and women.

At present men tend to receive more generous annuity rates. This is because the insurance company knows that on average it won’t have to pay out an income for quite so long for a man as it would for a woman and so it can afford to pay the man slightly more every month.

This means that for men, on 21st December, annuity rates will drop, typically by between 3% and 8% but in extreme cases it could be as much as 13%. We don’t expect there to be an equal increase in women’s rates as insurance companies will wait and see how the new rates affect their new business turnover.

We also expect that there will be considerable volatility in annuity rates in the first few weeks after the new rules come into effect. Even a drop of 5% could mean hundreds of pounds less income every year for the rest of your life.

It takes time to set up an annuity. You have to search the market, work out what type of annuity you want to buy – you can use an annuity search engine to help you narrow down your options and find the best rate.

You also need to arrange for the transfer of your pension pot to the annuity company and deal with any queries or problems that might arise. Typically the whole process takes weeks, sometimes even months to complete.

Because the process is relatively slow, anyone who is planning on buying an annuity in the near future and particularly if they are a man, should act immediately to give themselves as much time as possible to complete their annuity purchase ahead of the deadline on 21st December.