Women who leave their pension pots invested in the stock market could see their pension income rise by as much as 11% from December 2012, under new EU rules.
HM Revenue and Customs (HMRC) has announced that it will apply the same limits on capped drawdown for women as they do for men from 21 December 2012 under new gender equalisation rules, which dictate that financial products can no longer be priced on gender. The move will let women take 8% more in drawdown at 65 and 11% more at 80.
Capped drawdown rules changed
HMRC has changed the regulations on capped income drawdown – the process of leaving your money invested in the stock market when you retire – in response to a European Court of Justice ruling requiring ‘equal treatment between men and women in the access to and supply of goods and services’.
At the moment, retirees who opt not to buy an annuity with their pension pot can leave their money invested and take a certain amount each year as income. The sum you can take is restricted to prevent an individual’s retirement fund running out prematurely.
The cap HMRC imposes on drawdown income is based on life expectancy, as reflected in tables published by the Government Actuary’s Department (GAD). It is also determined by prevailing gilt yields, which influence the amount paid by annuity providers. Those with a guaranteed income of £20,000 a year can escape any restriction by going into flexible drawdown.
Action point: Income drawdown – find out more in our comprehensive guide.
Women’s pension income rises
Capped drawdown limits are calculated by checking the basis amount indicated in GAD tables. The current 15-year gilt rate is 2.17%. This gives a basis amount of £53 for a 65 year old man but just £49 for a 65 year old woman. At 80 the figures are £101 and £91 respectively.
For a pension pot of £100,000 this gives a ceiling of £5,300 for men and £4,900 for women at 65 and £10,100 for men, £9,100 for women aged 80. The difference is explained by women’s longer life expectancy- and the fact that their pension pot has to last for more years than men.
The EU gender directive eliminates the difference in rates, with HMRC switching to a single GAD figure from 21 December, 2012. Using the same rate as men means that a 65 old woman will see an increase of 8% and an 80 year old woman an increase of 11% in the maximum sum they are permitted to withdraw.
Annuity rates for women should improve at the same time, although those for men may fall as providers seek to equalise rates more evenly.
Action point: Annuities explained– get to grips with your options at retirement
Insurance premiums also affected
While women benefit from pension rule changes, they may lose out from the impact of the EU gender directive on car insurance. Historically, male drivers have been seen as a higher risk,with women’s insurance being slightly cheaper as a result. An equalisation of rates is expected to see costs rise for women, rather than fall for men.
Which? pension expert, Ian Robinson says: ‘Although most people will continue to buy an annuity when they retire, women who found their pension income restricted will welcome the new ruling. They should talk to their adviser about a review and check what new rate may be available. Although the gender directive delivers a potential uplift, this has to be balanced against falling annuity rates and the possibility of poor investment performance.’