Choosing a competitive annuity is a crucial decision. Get it right and you could enjoy a far greater income in retirement.
As a solution for providing us with an income in retirement, lifetime annuities are far from perfect. Annuity rates have crumbled in recent years and the prospects for a reversing trend don't look good. But the fact remains for the vast majority an annuity is still the best option for taking pension benefits - so it pays to know how to maximise yours.
In my previous article How To Get More Out of Your Pension Fund I looked at an innovative new product which could help you delay purchasing your annuity until you're older, are more likely to have suffered health problems and therefore may be able to take advantage of more generous annuity rates. Today I want to explain in more detail how you could be eligible for an enhanced or impaired life annuity and what this could mean for your retirement income.
But, first of all, what exactly is an enhanced or impaired life annuity?
Enhanced annuities provide people with a higher level of income if their life expectancy is deemed to be below average. Annuities are often criticised for providing poor value for individuals who don't survive to reach average life expectancy. Usually, if you only live for a few years after intially purchasing the annuity, the lion's share of your original pension fund will be lost.
But precisely because there's a higher probability you won't live to average life expectancy, some annuities companies will pay higher rates to reflect the lower risk you represent to them. And you don't necessarily need to be in a poor health to be eligible for better rates either. People who smoke or who are overweight, for example, could also benefit from the increased annuity these products offer.
Here are some examples of medical conditions or lifestyle factors which could qualify you for an enhanced annuity:
- High cholesterol
- High blood pressure
- Diabetes (insulin dependent)
- Smoking
- Obesity
- Stroke
- Emphysema
- Heart attack
If you suffer from a very serious medical condition, you could benefit from what's known as an impaired life annuity. This type of annuity could offer you a considerably higher annuity income if your life expectancy is significantly reduced as a result.
Here are some examples of medical conditions which could qualify you for an impaired life annuity:
- Chronic heart disease
- Chronic lung disease
- Some primary malignant cancers
- Secondary malignant cancers
- Motor Neurone Disease
- Parkinson's Disease
- Hodgkin's Disease
- Alzheimer's Disease
Research by the Office for National Statistics (ONS) revealed that, in 2001, healthy life expectancy was 67 years for men and 68.8 years for women. Therefore, if you can delay purchasing your annuity until these ages, then there is a greater chance you will qualify for an enhanced or impaired life annuity.
The table below outlines the difference this could make to your annuity income. By putting off your annuity purchase until you reach 70 or 75, you could receive an increase of around 25% on standard rates.
Enhanced Annuity Rates Vs. Standard Annuity Rates
Male/Female - Age | Average Standard Rates p.a. | Average Enhanced Rates p.a. | % Difference |
|---|---|---|---|
Male age 70 | £799 | £995 | + 25% |
Male age 75 | £946 | £1,212 | + 28% |
Female age 70 | £734 | £908 | + 24% |
Female age 75 | £855 | £1,073 | + 25% |
Source: Investment, Life & Pensions Moneyfacts. September 2007. Purchase price £10,000. Annuity rates are based on a single life, level income, guaranteed to pay out for five years with no escalation.
I know here at The Fool we continually harp on about shopping around for a better deal but there really is an excellent reason for that. With many pensioners struggling in retirement, making the most of your pension fund is essential and I think it would be foolish not check out whether you could get an enhancement to your annuity income. If your health has deteriorated far enough to make you eligible for impaired life rates then your income could be even greater.
Current research suggests up to 40% of people could take advantage of an enhanced or impaired life annuity, but the message is yet to catch on and many of us don't realise we're missing out on higher levels of income. For this reason, if you think you might qualify, it's vital to ask. There are companies out there such as Just Retirement, Partnership and Tomorrow (formerly GE Life) which specialise in this type of business. But even big players in the annuity market including Norwich Union and Prudential may offer uplifted rates.
Remember once you've committed to an annuity there's no going back, so the decision you make will affect the rest of your life.