Enhanced annuities: Who can benefit?
Annuity rates at their lowest levels ever.
So those retiring with personal or company money purchase pension plans need all the help that they can get to increase their pensions.
One way of doing this is apply for an enhanced annuity.
This pays a higher income for those with medical conditions which may reduce their life expectancy.
According to a recent survey from MGM Assurance, more than 70% those approaching retirement are missing out on increased annuity payouts because they do not apply for enhanced annuities.
How do they work?
At its simplest an annuity is a bet with the insurance company about how long you will live.
When you invest in an annuity, the life assurance company converts your pension pot into income payments (your pension income) which are paid for the remainder of your life.
If you are married or have a financially dependent partner, the annuity will continue while at least one of you is alive.
This means that if you die before your predicted life expectancy, the insurance company will make a profit which is used to pay the incomes of those who live longer than predicted.
If you live beyond your predicted life expectancy, you will have won the bet with the insurance company - and will have received a higher pension than you would have got by simply investing your pension in safe investments and taking the same income payments.
This is fine for those who are fit and healthy, but is not a good bet for those who are not in good health.
To help boost the pension incomes of those who have below-average life expectancy, insurance companies offer enhanced annuities.
These are simply annuity policies that pay higher incomes for those who:
- Take prescription medication
- Have been to hospital recently because of a medical condition.
The amount of extra income depends on your actual state of health or your lifestyle.
Those who are overweight, have high blood pressure or high cholesterol will get on average 7% more income than from a good health annuity.
But if you have smoked more than 10 cigarettes a day for at least the last 10 years, you may get up to 16% more income.
If you are very seriously ill, you make get more than a 20% uplift.
The chart below compares the different incomes for different levels of medical and lifestyle conditions for a man and woman aged 65 investing £50,000 in a single life annuity.
Gross annual income for a single life annuity, guaranteed for five years, level payments paid monthly. Source: Better Retirement Group.
How to apply
It is easy to apply for an enhanced annuity.
All you have to do is to provide the insurance companies with your medical details.
There is no need for a doctor's appointment as all the information is provided by you.
Sometimes the insurance company will write to your doctor to request more information, or to check that you have provided the correct details.
But you never have to attend in person.
There are three ways of providing your medical details:
- Completing a medical details form
- Entering your details on a specialised website
- Having a telephone interview with a trained nurse.
What about partners?
If you are married or have a financially dependent partner, you can apply for a joint life enhanced annuity which will continue to be paid to your partner if you die before them.
If your partner is in good health, it will reduce the overall enhancement.
But the annuity payments will be still be higher than a good health annuity.
If your partner is in poor health, then they will qualify for an enhancement in their own right and once again the annuity income should be higher.
'The only pleasure'
For those who do not like the idea of locking into a lifetime annuity, there are alternatives.
Firstly there is the option of pension drawdown, which allows investors to draw an income from their pension pot.
Although they cannot draw more than the maximum amount - which is approximately equal to a good health annuity - there is more flexibility over the death benefits.
Annuities have traditionally been a good bet for those with above-average life expectancy.
It was Voltaire who said: "I advise you to go on living solely to enrage those who are paying your annuities. It is the only pleasure I have left."
However those who have medical conditions can also enjoy the advantages of a guaranteed lifetime income by applying for an enhanced annuity instead of an ordinary one.
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