Could you qualify for an enhanced annuity (and not know about it)?
Once the staple choice for retirees in securing their pension income, annuities have lost their shine since the dawn of pension freedoms in 2015.
And their appeal has been limited by the fall in annuity rates, meaning at one low point, a £100,000 pension pot would only secure a £5,000 per year income.
But the guaranteed income aspect of annuities provide retirees with stability and surety. In fact, LEBC’s The Retirement Adviser, has seen annuity sales increase against the market trend.
Since pension freedoms were introduced in April 2015, the number of people opting for an annuity has increased 17%, and the total purchase price has grown from £34,000 to £57,000. Further, it adds that it is able to obtain higher levels of income for 67% of its annuity customers.
According to Just Group, an enhanced annuity can offer a retiree up to 25% more income.
Enhanced and impaired annuities
Enhanced annuities cover lifestyle issues such as smoking and drinking while an impaired annuity is based on medical factors which can mean a shortened life expectancy. The terms are often interchangeable but when shopping around for an annuity, your provider should take everything into account.
The typical factors affecting the annuity rate offered, according to The Retirement Adviser, include:
- Lifestyle: use of alcohol, tobacco and recreational drugs both currently and in the past
- Health: full medical history, height and weight, medication taken, treatment received and family history
- Occupation: both current and previous occupations may affect the income offered
- Postcode: there are established difference in life expectation and these too can result in a higher income
- Hobbies: and taking part in sports with an additional hazard.
From 1 March 2018, the Annuities Directive requires all annuity providers to show a comparison of their offer with competitors in the market. But LEBC argues that while this may prompt people to shop around, it can leave retirees with a ‘false sense of value’.
This is because the comparison will only be based on the facts which the provider knows about the consumer, and may not include the enhanced annuity offers which a thorough fact find would uncover.
Further, the terms offered by annuity providers can change weekly and even daily and offers are only guaranteed for a short period.
As such, LEBC recommends using a whole of market annuity specialist which can obtain up to the minute offers, and they will know which providers take account of certain lifestyle and health features.
Another important point to note is that annuity providers have dwindled in recent times. These are the current active providers in the market: Aviva, Canada Life, Hodge Lifetime, Just, Legal & General and Scottish Widows.
Kirsty Turner of The Retirement Adviser, says: “Underwriters award points for each factor affecting longevity, so a smoker with a history of high blood pressure and who is overweight and in a highly stressful occupation would qualify for more than just the regular smoker rate.
“Each underwriter will add different weight to each factor, so that only a whole of market specialist will be able to determine the best offer for any individual applicant at that time.”
Kay Ingram, director of public policy at LEBC, adds: “In our experience it’s human nature to dismiss health and lifestyle factors which are likely to affect lifespan. But we don’t just accept a ‘tick box’ answer.
“An initial question may be ‘do you rate your health as good, average or poor?’. Many may assume that only those who answer ‘poor’ need investigating further. But that would be a mistake.”
Ingram adds that around 50% of over 45s in the UK are prescribed medication for high blood pressure and/or high cholesterol, yet the majority perceive their health as good.
“Suffering from either of these common conditions will earn around 10% extra income, and if both are present, the increase in income offered is more,” she says.
A final point to note is that it’s important to look at the health and lifestyle factors not just as they are now but how they may have been in the past.
“Someone may have given up smoking 10 years ago but if before that they smoked 20 or more cigarettes per day for 30 years then their life expectancy will not be as good as someone who never smoked,” Ingram adds.
“Similarly someone could be retiring from an office-based job but if they spent their earlier years as a coal miner they are likely to have a lower life expectation than someone who has always had a white collar job.”
For Stephen Lowe, group communications director at retirement specialist Just Group, Brits tend to be quite polite and gloss over any aches and pains.
“How do you respond if someone asks you about your health? ‘Can’t complain’? ‘Not bad’? That could be a mistake when it comes to securing a guaranteed income for life.
“We’re all different and we all have different life expectancies. That matters not just for how long we’ll live, but also because someone with a shorter life expectancy is likely to see an increase in the amount their guaranteed income for life will pay them each year – this can typically be as much as 25%.”
Lowe adds that Just Group offers a personalised and medically underwritten guaranteed income for life.
“When it comes to buying an annuity, your adviser should ask you some searching questions about your health – and if they don’t make sure you tell them about any medication or health conditions you may have, or had, even if you feel pretty well.
“What might seem insignificant to you could make a significant difference to your income in retirement. Before you purchase, make sure to ask if your personal health and lifestyle factors have been taken into account.”
Example annuity rates
Based on a £100,000 purchase price, The Retirement Adviser calculates that a single standard annuity for a 65-year old (level in payment, 10 year guarantee period to protect income against early death) would come in at £5,494.56.
However, for a regular smoker, the rate offered would be £5,966.40 – nearly £500 a year more.
The below table from Just Group compares the calculations of a £1m pension pot of four people with different health and lifestyle factors, all aged 65 and living in the same postcode (click to enlarge):