In March 2011 the insurance industry received a blow from the European Court of Justice (ECJ). Despite statistical evidence that in general women live longer than men, the industry must move to using gender-neutral rates by 21 December 2012.
Individuals seeking an alternative to an annuity have the option of capped drawdown. Although this is not an insurance transaction, the principle is that the maximum income available should broadly reflect the annuity income that could have been secured on the open market as an alternative.
As we know from the ECJ ruling, annuity rates will be changing to a gender-neutral rate, therefore HM Revenue & Customs (HMRC) has determined that the capped drawdown calculation will need to follow suit.
HMRC had a dilemma. It needed to advise the pensions industry what the new gender-neutral rates would be, but it does not yet know what the annuity market will do in terms of moving to a gender-neutral rate. The expectation is the market will move to a rate somewhere between current male and female rates.
HMRC’s solution was to use the current male capped drawdown rates as the new gender-neutral rates with effect from 21 December. Men are unaffected and women will gain from using what were male rates.
By how much will women benefit from the new male-based gender neutral rates? Roughly, the male rates are 6% to 8% better than female rates. This means a woman aged 65 with a £100,000 fund and based on the current 2% gilt rate would benefit from a maximum capped drawdown income rise from £4,900 to £5,300.
This situation may be short-lived as HMRC is likely to adjust the capped drawdown rates once it is clear how the annuity market has reacted to changing to a gender-neutral rate. When the change occurs, the adjusted gender-neutral rate is likely to make the income drawdown calculation worse for men and less beneficial for women.
Window of opportunity
This creates a buy-while-stocks-last scenario. Women might like to consider delaying until 21 December to take advantage of the improved drawdown rate, which would then not ordinarily need to be reviewed for a further three years.
The key for men contemplating entering into capped drawdown will be to act before the gender-neutral rates are changed, so maybe sooner rather than later.
Women who are already in capped drawdown and whose capped drawdown anniversary occurs after 21 December but before any subsequent change towards gender neutral rates might like to consider invoking a drawdown review to lock into the more beneficial rates.
Robert Graves is head of pensions technical services at Rowanmoor Pensions