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Gender equality ruling: another blow for men on 'drawdown' pensions

A forthcoming European Court of Justice ruling on gender equality is set to further cut incomes for men on drawdown pensions.

Gender equality ruling: another blow for men on 'drawdown' pensions

Those on income drawdown pensions – where you leave your pension fund invested and take an income from it rather than buying an annuity – have been hit hard by low gilt yields and a reduction in the amount of cash that can be taken.

But men could find their incomes reduced further as 'gender neutral' pricing comes into force this year.

The amount of income you can take in drawdown is linked to annuity rates set by the Government Actuary’s Department (GAD) – known as GAD rates.

These run parallel to the annuity rates being offered in the market by the companies that provide these products – so if the market rate for an annuity for a 65-year-old male with £100,000 pension pot is £6,000 then the GAD rate will be set at around £6,000.

The problems

However, drawdown income has been hit by a triple whammy of problems and changes.

Income received from annuities has fallen steadily due to the link with UK government bond, or gilt yields. A rush by investors into the safe haven of government debt, exacerbated by the government buying back its gilts under the controversial £325 billion quantitative easing (QE) programme, has pushed down gilt yields to historic lows.

Unfortunately this has meant that annuities, which traditionally invest in gilts, have provided lower incomes. The National Association of Pension Funds has estimated that QE alone has wiped £90 billion off pension pots.

As annuity rates fall, GAD rates have fallen in line with them.

A change to the amount of drawdown income you can take has also made a significant difference to retirees. Until last year those in drawdown plans were able to take up to 120% of the GAD rate as income, but this figure has been revised down to 100% as the government’s fears over people's longevity grow.

The government is concerned that as people live longer, allowing them to take more of their pension pot could see them run out of money and fall back on the state for support.

The reduction from 120% to 100% will mean a man aged 65 with a £100,000 pot will now be able to take a maximum annual income of £6,800, compared with £8,160 before the reduction.

A woman of 65 with a £100,000 pension pot will be able to take an annual income of £6,300 under the new rates, whereas she could have taken £7,560 under the old rates.

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26 comments so far. Why not have your say?

John Griffiths

Mar 10, 2012 at 16:43

I agree that it is high time to disconnect the GAD rate from Gilts - a setting by government would be a much fairer arrangement. Also I believe that bringing female rates into line with men is unfair in equality terms - the differential is there to equalise the overall amounts paid out due to differences in life expectancy. A total misuse of equality legislation!

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Mar 10, 2012 at 19:42

This is one more mechanism for governments and the financial services industry to steal the money in pensions. The court are simply acting as a stooge. Alas, pensions are too tempting to our political masters and to the banks. Both covet other people's money.

Where then can they get such money in large amounts ?

Ideally, they would want some place where people,

- put lots of money,

- for long periods,

- with little, or no, real control nor even access (ie you can't have it back till you are old).

Governments (UK ones in particular) have realised that pensions are the obvious target. It seems unlikely that they will stop until all the money is gone.

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Mar 11, 2012 at 09:02

I'm looking to retire in six years at age 55. I currently have 4.4% in for the drawdown I'll be allowed - does this look realistic?

To be honest, I wouldn't go much above 5.5% even if allowed to as you don't need to go much higher to have a sizeable risk of wipe out over a 30 year period, but I'd love to go higher until state pension kicks in and then back off a few notches.

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Mar 11, 2012 at 09:32

Ignoring sex in annuity calculations makes no sense to me, and results in a gross inequality. Since women generally live longer than men, they WILL on average earn much more in total pension payments for the same premiums than men. Men will effectively be subsidising the higher return-on-investment that the women will be achieving. Is this not INEQUALITY rather than EQUALITY?

And also, if you have a medical condtion that shortens your life expectation you can get an impaired annuity which takes this into account. But the most basic biological condition of all - your sex - has to be ignored. What happens if you have a sex-related medical condition? Such as breast cancer or prostate cancer? How do you ignore the sex-related bias of these conditions? Is this not bizarre?

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Mar 11, 2012 at 09:38

current GAD rules far too harsh - its ironic that you could forgo your SIPP fund and buy an annuity with AVIVA - or you could invest your SIPP funds in AVIVA shares and/or Prf shares and get same or even higher return and AND retain ownership of your capital......

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Rob Walker

Mar 11, 2012 at 10:34

re. ", the pot is either passed to a spouse or civil partner who can continue to take the income, as long as they have a £20,000 secured income already."

- I'm a bit confused. Presumably the spouse can still take drawdown but if secured income is less than £20,000 then the spouse's drawdown is regulated by GAD rates. Is that correct?

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Brian Mclean

Mar 11, 2012 at 11:16

Unfortunately January saw my 5 yr drawdow period come to an end and overnight my private pension income reduce by 46% !! The effect on my cash flow is dramatic to say the least.

As has already been pointed out not only has my fund been hit by the share markets & reducing annuity rates but the reduction from 120 % to 100% G.A.D, but the new calculation now only lasts for 3 yrs so the next compulsory recalculation, at the end of 2014, will likely see a further drop !!

All the time Standard Life,(my pension provide ), are happily taking their share and using my 'hard earned' to lend out at 8/ 9% + , not only that but if I die they

I therefor suggest the last thing to invest in now is a pension !!

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Brian Mclean

Mar 11, 2012 at 11:18

3rd para should end ; 'they get it all '

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Mar 11, 2012 at 12:15

Certainly withdrawals above 5% are probably not sustainable over a 30 year period but a key question is whether the pension is the sole source of income. If not its probably better to raid the pension pot first and reinvest income on any other capital, especially if its in an ISA.

Unfortunately the rules are too rigid to permit this.

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Hyman Wolanski (MD Sippchoice)

Mar 11, 2012 at 12:41

The principle of basing the maximum amount of drawdown income on prevailing annuity rates is pretty reasonable in theory and has generally worked well in practice. However, it no longer works well and needs to be revisited. It's not that difficult to devise a system that tracks annuity rates without being linked solely to gilt yields.

The unisex annuity issue is not one for which the Government can be blamed. It is the result of a decision by the European Court of Justice which decided that, under an EU Directive that prohibits discrimination based on gender in the access to and supply of goods and services, insurance rates must be unisex. The issue, therefore, is with the EU Directive, which is based on a political decision that it is 'fairer' to charge men and women the same insurance premiums than to charge them premiums that more accurately reflect the underlying risks determined on the basis of their gender.

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Mar 11, 2012 at 13:04

@Brian - the first thing people should be investing in is a 6-12 month cash buffer. Once that is in place, they should invest in a pension IF they benefit from employer contributions and/or HR tax relief and/or salary sacrifice. After that, spare cash can go into S&S ISAs and/or BTL and/or anything else they choose that will generate long-term income and/or capital gains.

I'm mighty glad that pensions are part of the available retirement arsenal, but am also ensuring that I have other income streams that are more flexible even though they are less tax efficient.

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Mar 11, 2012 at 13:50

I suppose this is all the more reason to balance ISAs and pensions. You can "draw out" as much as you like from an ISA and its your responsibility to decide how much.

How can we be expected to plan when the rules keep changing. I understand that returns on investments go up and down and I have to allow for that when working out how much to save for retirement but, when the government arbitrarily changes the rules when there isn't time to compensate for it, it makes planning pointless.

Spend it all and become a burden on the state.

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Mar 11, 2012 at 14:55

Hyman - I can envisage a situation where annuities are such appalling value for money that only a tiny minority will be prepared to purchase them. What should the GAD tables do then? I can certainly draw a pension from my SIPP and keep the fund at more or less the same level, and I am fully invested in the so-called "risky" equities.

The civil servants who draft the pensions legislation all have pay-as-you-go index-linked pensions, so they assume everyone will want to replicate those. But as we are now finding out, it is incredibly expensive to do that.

I'm gradually transferring my non-pension portfolio into my ISA each year. So far I haven't needed to touch it, but it's very tax-efficient and I don't have to account to HMRC every year for income and capital gains.

Perhaps the GAD tables should assume everyone also has an ISA?

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Hyman Wolanski (MD Sippchoice)

Mar 11, 2012 at 15:39

Maverick - I think that the Government understands that it needs to tread a fine line here. On the one hand, allowing lots of flexibility on drawdown (like flexible drawdown) is good for its cash flow, since it gets the income tax on the drawdown payments earlier, but, on the other hand, it increases the chance that the individual will run out of money and become a burden on the State.

Incidentally, you refer to a situation where annuities are appalling value for money and this reflects a common view that annuities are one of the biggest evils on the financial landscape. That's unfair - annuities do what they say on the tin (i.e. provide a guaranteed income for life) and this requires a very conservative approach to investment and longevity assumptions. Academic studies generally conclude that they're fairly priced for what they provide. [Note: I have no financial interest whatsoever in promoting annuities but they do have a very legitimate role.]

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Mar 11, 2012 at 16:02

The decision is yet one more example of the insanity prevalent in the European Court.

It is also a political decision and no doubt one that the govt will welcome hugely because it secures to them huge windfalls in tax (shades of Brown/Balls), if the individual survives beyond 75 (35% to 55%).

And then, in my case I am single, well divorced, for many years. So why shouldn't the rate of drawdown reflect my circumstances, and not the theoretical life span of a female.

My father died aged 81, and my mother aged 94.

Besides which, my Sipps adds fringe benefits, the main income comes from my private portfolio.

Now to factual matters, my SIPPS currently yields a tad over 3%, but as non dividend paying assets start paying dividends again, that is likely to rise, which means that my fund will be forcibly increased (fed) to the benefit of the State when I pass on.

Now in the interests of fairness the Court must now force the same level of yields on all pensions, and that includes civil servants and MPs, thus spreading the pain for the betterment of the State.

The next step for the Court, as they have stepped into this arena is to order that all are equal in all respects, mean can bear children, women are as strong as men, etc, etc, etc, etc and put in place the rules to bring this about. No ifs and buts, they chose to interfere.

Unfortunately they cannot recognise the fact that that is impossible because either they must extend the age of death of men, or shorten the lives of women (setting a date of death and arranging executions) and so on and so forth.

Clearly they cannot do the last few things, but then there is no cure for political madness.

Time to cut ourselves free from the Court and their insane , yes insane, decisions.

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Mar 11, 2012 at 18:04

And oh, in the circumstances, an infringement of my human rights not to be forced to be forced to stuff captive funds to benefit the state..............

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martin hargan

Mar 11, 2012 at 18:06

maverick is so right Let down by Equitable Life debacle I have since accumulated a sizeable Sip total with ATS in investment Trusts but at 71 for the first year ever can't be bothered to top up with 2880. No faith in these daft destructive rules want out feel so powerless.And who knows when the next lot start to help themselves to our ISAs Nor were we given sufficient time to adapt to the gad rate changes So many smug pals on impossibly generous index linked pub sector pensions.

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Nicholas Kendal

Mar 11, 2012 at 18:31

Impaired health ; since annuities can be bought at enhanced rates due to impaired health risks, the government should make a similar varience available via enhanced GAD rates to qualifying drawdown pensioners.

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Ethical Banker via mobile

Mar 11, 2012 at 18:32

Ins. companies should start offering joint annuities for couples. Then (other than a small adjustment for same-sex couples), annuity pricing can still take advantage of the longevity difference between men and women, without falling foul of the ECJ ruling.

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Mar 11, 2012 at 19:46

My SIPP is in "last chance saloon" - any more state meddling (with negative affects) and I'm giving up on it....

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Mar 11, 2012 at 22:08

No Spartacus, do what your namesake did, lead the revolt!

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Mar 11, 2012 at 23:48

Its pretty obvious that many people here are really peed off with the govt reducing the 120% of GAD rule. Me included.

Does anyone think that there would be any mileage in forming a pressure group with enough clout to obtain an appointment with the pensions minister to put our case? There are allegedly 200k people with drawdown pensions.

Could we maybe get a change or am I being completely naive?

Ideas anyone

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Mar 12, 2012 at 12:58

Hyman - Annuities only do what they say on the tin until the first annuity provider fails! Equitable Life came within an inch of doing that . . . .

In any case, if the price for the annuity provider not failing is that annuities have to become even more expensive, I fear pensioners will vote with their feet and go into drawdown. There must be a "tipping point" where the annuity providers do not have enough customers to make the longevity sharing viable.

And the longer I leave it before buying an annuity (if I ever do), the better value they are.

Mike R - Having lobbied Parliament in the past, you're right, the only way anyone will change anything is to make a fuss about it. I'll join up!

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frank hay

Oct 10, 2012 at 18:10

Me to.

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Oct 10, 2012 at 18:30

I'm encouraged to see so many responses that reflect my views on annuities!

I think Snoekie is right about starting the revolution, also think Ros Altmann would support this - you need some names that Govt will listen to. I'm certainly in for making it a public issue. Is the 100,000 signature route a possible way forward?

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Oct 10, 2012 at 18:40

AJ Bell are having a bit of a campaign on this and have a sample letter you can send to your MP.

Spread it wide and shout it loud.

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