What are Enhanced Annuities?

The reason why most financial experts recommend that you fess up to any lifestyle habits or medical conditions that you may have while speaking to a pension provider, is that you may qualify for a higher retirement income.

A lot of people find it too embarrassing to admit the fact that they have been leading an unhealthy lifestyle all their lives or that they may have a medical condition that can reduce their life expectancy.

But while planning for retirement, it becomes a crucial necessity that you own up, because your health condition can determine your cost of living in the years to come.

So, if you are eligible to get a higher monthly income, why wouldn’t you want to take it?

An enhanced annuity is an additional income that eligible retirees can receive if their life expectancy is lower than the national average.

Some pension providers also call it an impaired life annuity or smoker annuity. Statistics reveal, that in the UK, up to 60% of retirees may qualify for some type of enhancement in their annuity.

The Eligibility

Impaired annuities were first introduced in the year 1995 in the UK. Since then, new medical conditions and lifestyle conditions have been constantly added to the list.

Some of the conditions that may make you eligible for an enhanced annuity are:

  • Heart Disease
  • Cholesterol
  • Diabetes
  • Cancer
  • Smoker
  • Parkinson’s disease
  • Stroke
  • Hypertension
  • Angina

These are, of course, just some of the conditions that may make you eligible. If you receive an impaired annuity quote, ensure that you provide all valid details to receive the highest rate.

If you omit any valid information, your potential income may be reduced.

How much more income will I receive?

1. Lifestyle Related Conditions: If you have lifestyle-related conditions then you may be eligible for up to 18% more income than what the highest standard annuity can pay you. Some of the lifestyle conditions that qualify are obesity (BMI of 34 or more), smokers (people who smoke less than or more than 10 manufactured cigarettes per day), smokers who have stopped smoking recently (mostly in the last 6 months) and those taking prescription medicines for high blood pressure or cholesterol.

2. Impaired Health conditions: Impaired health conditions like diabetes, cardiac problems or cancer can make you eligible for up to 40% more income than what a standard annuity can pay you. Graver conditions can qualify for a higher enhancement rate. For example, people who may develop diabetic neuropathy or are suffering from asthma may qualify for a higher rate. These are not the only conditions though. Thousands of other health conditions can be considered as an impaired health condition, especially if it can have permanent effects on a person’s life. For example, paralysis or stroke which can affect the way a person moves or lives their life every day.

How to get the best rate

Just because your pension provider gives you a quote for an enhanced annuity, that does not mean you jump to conclusion and sign up.

The rule of thumb is that if you shop around, you may always get a higher rate.

  • Get impaired annuity quotes from multiple annuity providers
  • Mention as many details as possible about your medical condition. For example, if you have asthma, do you use a face mask or have breathlessness attacks?
  • If you qualify for lifestyle conditions, do not be ashamed to own up about the number of cigarettes you smoke each day. For example, someone who smokes more than ten cigarettes in a day may qualify for a higher amount than someone who smokes less than ten a day.
  • Ask what your options are regarding the annuity amount in the event of your untimely death. Can the annuity amount be paid to a dependent spouse or children for the rest of their lives?
  • Ask what the tax implications are.

The annuity provider may also require your medical files or ask you to undergo further medical checkups to ensure that you are eligible.

Single vs Joint Life Annuity

If you are nearing retirement and have decided to opt for the tried and tested route of buying an annuity which will give you a fixed income until your death, then you will have a vital decision to make.

Should you opt for a single life annuity which provides you with a potentially higher income for the rest of your life? Or opt for a joint life annuity which gives you a lower income while you are alive, but continues to pay it to your spouse/partner or children after your death?

As with all decisions about retirement, your choice of annuity is a very crucial one that can have a significant impact on the way you live life in the years to come.

The best way to come to a conclusion is to seek independent financial advice. The other way is to get as much information as possible about the pros and cons of each type of annuity which will help you make an informed decision.

Single Life Annuity 

A single life annuity has the advantage of giving the annuitant a higher rate of income. This income will be provided either for a fixed time period (Guaranteed Time) or until the death of the annuitant.

It is ideal for retirees who do not have a dependent spouse or child. In simple terms, if you are single or your spouse/partner has made adequate pension arrangement, then a single life annuity will be the right choice for you.

Upside: Higher income as compared to a joint life annuity for the rest of your lifetime

Flipside: The payment will cease at your death. Your spouse/partner or children will not receive any financial support after your death.

Tips while buying: If you have decided to opt for a single life annuity, then you should shop around to find the best rates and features.

Joint Life Annuity 

If you have a spouse/partner who is dependent on you for financial support and you wish to provide them with some sort of financial stability in the event of your death, then a joint life annuity may be the right choice.

A joint life annuity will provide a monthly income to your dependent nominees after your death. You can opt for a fixed income level spread out over the entire duration of the annuity, or you can reduce it by a percentage after your death.

Typically, the lesser you choose to be paid out after your death; the more you receive while you are alive. So, if your dependent partner has another source of income or has managed to save some funds for her twilight years, then it is better if you opt for a higher income while you are alive.

Upside: Your financially dependent spouse/partner or children will receive a monthly payment after your death

Flipside: Your monthly income will be lower than a single life annuity. Also, some providers may impose certain restrictions. For example, they may not accept your partner as a nominee if they are younger than you by ten years or more. In other cases, you have to be married or in a civil partnership to be able to nominate your partner as a dependent. If you are choosing your children, then the income will only be paid until they reach a certain age (usually 23)

Tips: Shop around until you find the best rates even when you split your income. If you have opted for a guarantee period, then ask your annuity provider for an overlap service. If you opt to choose an overlap, then your dependent partner can maximise the payments in the event of your early death.

Remember that buying an annuity is not the only option you have now. Pensioners now have more flexibility and choices in the way they access their pension pot. 

Alternatively, you can also access Pension Wise’s free government-backed service to get impartial financial guidance.

 

Types of Annuities

Despite the new changes to Pension rules that came into effect in April 2015, most retirees still consider it a better choice to get a fixed income for life, also called an Annuity.

If you have considered your current financial circumstances and have decided that an annuity is the right choice for you, then it is imperative that you buy the correct type of annuity.

Yes, buying an annuity is a task that requires a fair amount of forethought because it is mostly an irreversible decision. Your choice of annuity will also determine the fixed-term income/ monthly income you and possibly, your dependants may receive for the rest of their lifetime.

There are different types of annuities and your choice should depend on your individual financial requirements.

1. Lifetime Annuity: A lifetime annuity provides you with a fixed lifetime income based on your life expectancy and current annuity rates. There are two varieties of Lifetime Annuities.

  • Basic Lifetime Annuity where you can fix your income beforehand. Once again you have the option of choosing between a single life annuity (income only for you) or joint life annuity (if you wish to nominate a beneficiary to receive the income after your death)
  • Investment Linked Annuity is a type of fluctuating income annuity where the income depends on the performance of your investments. There are two different types of Investment Linked Annuities. One is With-Profits Annuity where the income is dependent on the performance of the With-Profits funds of the Annuity Provider. The second is Unit-Linked Annuity where the income will be dependent on the funds that you choose to invest in.

In a lifetime annuity, the annuity rate will be the income that you will receive on every £ that you have accumulated in your pension pot.

2. Enhanced Annuity: An enhanced annuity is normally offered only to people who may have a shorter life expectancy. For this reason, it offers a higher annuity rate which means, a higher retirement income. Some of the criteria for eligibility include:

  • Smokers or a past history of smoking
  • A health condition or disease
  • Obesity
  • A work or employment history in a potentially hazardous environment

The insurance company may ask additional questions before you are considered eligible for an enhanced annuity.

3. Impaired Life Annuity: These are offered to people who suffer from or have suffered from any medical condition which may have reduced their life expectancy. Annuity providers seek complete information on the medical history of the annuitant and additional medical examinations may also be required.

4. Post Code Annuity: A Post Code Annuity offers you a customized annuity rate on the basis of your area of residence. People living in wealthier areas typically receive lower annuity rates as their life expectancy is considered to be higher than that of people living in poorer areas.

5. Temporary Annuity: A temporary annuity pays you an income for a fixed time period or until your death (whichever is earlier). The maximum term period for this type of annuity is five years and hence, it gives you a far higher annuity rate as compared to an equivalent lifetime annuity. You will only need to use a part of your pension pot to purchase a temporary annuity.

6. Investment Linked Annuity: This is a hybrid plan that gives you a partially guaranteed income while the rest of the income is dependent on the performance of your investments. You can select the guaranteed income you need and use a part of your pension pot to buy an annuity which would provide that. The rest of the pot will then be invested and will provide you with additional income on the basis of the returns that these investments generate. If the investments perform well, the additional income will be significant. If the markets are not performing well, then you will only receive the minimum guaranteed income.

7. Purchased Life Annuity: A purchased life annuity, also known as a PLA is a special type of annuity that can be purchased with your income or savings fund that is not part of your pension pot. You may also buy it with the 25% cash lump sum which you may draw from your pension fund. It will provide you with a fixed monthly income but has different tax implications.

8. Fixed and Increasing Life Annuity: A fixed income or a level annuity will pay you a fixed income for the rest of your lifetime. On the other hand, an increasing or escalating annuity will provide you with an ‘inflation-proof’ retirement income. An increasing life annuity has two varieties:

  • Index Linked: Your annual income will be adjusted according to a designated level of inflation which is usually based on the Consumer Price Index or the Retail Prices Index. So, if inflation rises, your income increases too. On the contrary, if inflation reduces as it happened in April 2015, your income may reduce also. But its buying power is retained no matter which way the prices go.
  • Increasing Rate: Your income will increase every year at a set rate which can be selected by you at the start of the annuity term. It can be between 0.8 to 5%. The rule of thumb is that the higher the percentage by which you want the income to increase each year, the lower the starting income will be.

 

What is an Annuity?

If you have been meticulously contributing towards a ‘defined contribution pension scheme’ all your working life, then you should have accumulated a sizeable pension pot by the time you hit 55.

The big question though is what you should do with it.

With the new Pension Freedom reforms introduced in April 2015, you can now take the entire pension pot as one or more cash lump sums receiving 25% tax benefit on each withdrawal.

The other option is to buy an Annuity.

Annuities explained 

An annuity is a product that will give you with a guaranteed retirement income for the rest of your life, in exchange for a part or whole of your retirement pot. It is like life insurance in reverse and is sold by insurance companies.

Most people take 25% of their retirement pot as a tax-free lump sum amount and use the rest to buy an annuity. However, you may also use your entire pension pot to buy one.

Annuity rates may differ from one insurance company to the other and you can either buy one from your current pension provider or shop around for the best rates.

There are many types of annuities. But the two basic types are:

  1. Lifetime Annuity: A lifetime annuity is beneficial if you have a dependent to provide for after your death. It provides you with an income while you are alive and then will pay a nominated beneficiary to be given a fixed income for the rest of their lifetime. If you nominate a dependent child, then the income will only be paid for a fixed number of years.
  2. Fixed Term Annuity: A fixed term annuity provides you with an income for a specific term period (five or ten years). You will then be paid a lump sum amount as ‘Maturity Amount’, which you can either take as cash or use to buy another retirement income product.

How much income will you get?  

Most people have this question in mind while looking to buy an annuity.

There are online Annuity Income Calculators which can give you a ballpark figure.

But the actual income that you will receive will depend on multiple factors.

Some of them are:

  • Your age when you buy the annuity
  • The amount that you have accumulated in the pension pot
  • Your health
  • Your lifestyle habits
  • Annuity rates at the time of purchase
  • The type of annuity you choose
  • The features you choose in the annuity

A large number of people in the UK do not fully explore all possible options before choosing an annuity. Hence, they end up with potentially lesser retirement income than they should receive.

Also, buy an annuity is an irreversible decision. (This will change in 2016)

Hence, it is extremely important that you shop around to find the best annuity rates and features that are suited to your current financial situation and future requirements.

Shopping for your Annuity

Your goal should be to find an annuity that provides you with the maximum income from your pension pot.

  1. Decide on the type of annuity that you wish to buy. Is it a lifetime annuity or a fixed term one?
  2. If you have any health conditions or lead an unhealthy lifestyle, then do not hide it from your pension provider since you may qualify for a higher income by opting for an enhanced annuity. This is also called an ‘Impaired Life’ annuity by some providers.
  3. Speak to your existing pension provider about an annuity and check the rate they offer. Are they offering a GAR (Guaranteed Annuity Rate)? These are extremely valuable as they provide much better rates than the ones generally available. This retirement income can be used as a point-of-reference to shop around for better deals.
  4. Compare multiple annuities for the best rates. Do check if there are any restrictions that apply.
  5. You can hire the services of an annuity broker. While a broker can give you a clear picture of the various options you have, they will not recommend any particular product.
  6. Consult a retirement expert or financial advisor to discuss your findings from the above steps. They will give you the best impartial advice after taking into account your personal and financial circumstances.

Remember, buying an annuity is a one-time decision that will impact your retirement income for life. Ensure that you seek professional advice before making a choice.

 

If you are looking for a professional financial advisor, read our article, ‘How to Select a Financial Advisor’ for more information.

What Is the Open Market Option?

Before reaching your retirement, you will be able to receive two pieces of information from the provider of your pension:

  • The value of your pension fund
  • An annuity quotation

An annuity is a product that consumers can purchase when you retire. It is created to provide a guaranteed income for the rest of your life. However, this is not the only way that you can take an income away from your pension pot.

Once you decide to acquire an annuity, you do not have to go with the quote you are given by the provider of your pension. Instead, you can shop around and compare various annuity rates: this is what the “Open Market Option” actually means.

Shop around

These are the reasons why you should shop around for your annuity:

  • There are a lot of variations in annuity rates. This means that shopping around for the best one is important. You could get up to a maximum of 40% more income in some cases.
  • Later on, you will possibly not be allowed to swap providers or swap annuity. So your decision will affect your life. It is therefore important that you are getting the best annuity before purchasing.

Get personalised annuity quotations

Always attempt to get quotes that take your lifestyle, medical, history, and health into consideration. If you smoke or suffer from bad health,  you may be qualified to receive a higher income in retirement.

Do not automatically discount what your pension provider gives

Even though it is important to shop around, this does not necessarily imply that what your pension provider offers will be uncompetitive, so it is necessary not to cut this quote straight away. For example, if you possess an older pension, you may be granted a Guaranteed Annuity Rate (GAR). Annuity rates have decreased over time, so a GAR may be a lot higher than the best annuity rates presently offered in the open market (your GAR will have been set when you took out the pension).

You should opt for professional advice if you are in any way not sure of which annuity is best.

Buying an annuity is just an option that is available in retirement. Rules that came into effect in April 2015 will give you much more flexibility around how you take your pension income.