Most of us are familiar with the idea of an annuity. It is an income that we can buy with the contents of our pension pot.
An annuity will bring in a fixed income for the rest of our lives, whether we live to be 100 or fall under the proverbial bus tomorrow.
However, since pension freedoms came in 2015 there have been other ways to get a retirement income. Many people have been choosing them for the simple reason that they pay better than an annuity.
The problem with annuities
Annuities are provided by insurance companies. They take your pension pot, and in return, provide you with an income. The size of this income will depend on a number of factors, chiefly the size of your pension pot, but also on the prevailing rates available in financial markets. If interest rates are high your annuity provider can afford to be generous. When rates are low an annuity will not look good value. At one point, a £100,000 pension pot would only secure a £5,000 per year income with an annuity. Most of us would expect rather more.
It’s hardly surprising that annuities have fallen out of favour. But there is another factor in determining the value of the annuity you will be offered. Your life expectancy.
If you are unhealthy, it is reasonable to expect that you won’t live as long as someone who is in the peak of health. Because you are not expected to live as long, the insurers can afford to make your annuity a little larger. They don’t expect to have to pay it for as long.
It’s the mirror image of life insurance, where factors like heart disease and smoking mean higher premiums. If you are seen as not likely to enjoy a long retirement, you could qualify for an ‘enhanced’ or ‘impaired’ annuity. Your income could be as much as 25% greater as a result.
What factors mean an enhanced annuity?
Technically, enhanced annuities cover lifestyle issues such as smoking and drinking, while an impaired annuity would be based on medical factors, such as a history of heart disease. In practice the terms are used interchangeably.
The key factors include:
- Lifestyle: alcohol, tobacco and recreational drugs now and in the past could make an enhanced annuity appropriate
- Health: a chequered medical history, a current need for medication and a family history that includes serious illness reflect on your own life expectancy
- Occupation: current and previous occupations may affect annuity entitlement
- Hobbies: dangerous sports mean increased risk of accidental death
- Postcode: where you live can affect your life expectancy
But many people who should be entitled to an enhanced annuity miss out. The offer will only be based on the facts the provider knows.
A heavy smoker with a history of high blood pressure and who is overweight and in a highly stressful occupation would qualify. But someone who has sworn off the cigarettes and stopped drinking on doctor’s orders might feel that their health is now good, although their life expectancy may well have been reduced.
Similarly someone in an office job may feel they are low risk, but neglect to mention their hobby of technical diving.
You might need a thorough fact find to help secure an enhanced annuity offer. At Continuum, we would be pleased to provide it.
The value of your pensions, and the income from them, can fall as well as rise and you may get back less than you invested.
yourmoney.com – Could you qualify for an enhanced annuity (and not know about it)? – 25th May 2018