What is an enhanced annuity?
The simplest annuities are single life annuities, which cover only your life and stop after your death.
In this scenario, even if you have received less money from your insurer in income than you paid them to buy the annuity, the annuity dies with you. Although you can buy joint life or guaranteed annuities to provide an income for loved ones after your death, this generally results in a lower payment to compensate.
The insurer is still required to pay you an income even if you live beyond the date where you start to receive more from the annuity in income than you paid to purchase it.
Therefore, as life expectancy continues to rise and insurers have to pay annuities for longer periods, they are offering less generous terms to ensure the annuitant’s cash lasts.
However, if you have a medical condition that affects your long-term health or life expectancy, or if you smoke, then you may be able to receive a higher or enhanced annuity payment from your insurer.
When you’re younger, having a serious medical condition counts against you when you’re buying life or health insurance, because insurers see you as a greater risk (i.e. you’re more likely to make a claim because of that serious condition). The same is true if you smoke, because of the negative impacts tobacco use has on health.
However, when it comes to converting your pension fund into an annuity, having a serious condition means that you payments are likely to be higher, so long as you disclose the condition to the company when you are asking them for an annuity quote.
Larger payouts for shorter life expectancy
If you have a condition where your health is compromised and your life expectancy is five year or less, then your annuity payment might be increased by as much as 50% over the offer you would be made under standard terms.
If the insurer grants your application for an enhanced annuity, they will offer you a higher income than they would normally.
This is because they are statistically likely to make payments to you for fewer years than they would to a person in good health.
How do enhanced annuities work?
When you are looking to convert your accumulated pension fund into an annuity you can shop around amongst insurance companies to find the most competitive deal.
An annuity company will offer you an annuity rate which is usually, but not always, fixed for the rest of your life. The offer they make will depend on a number of factors, including your age, your health, and whether you want your annuity payments to be fixed or to rise in the future (e.g. index-linked to rise with inflation so the annuity retains its purchasing power).
Annuity rates are different for each person. There is no standard rate, and the rates offered to an individual will differ between providers.
You need to think carefully about what your needs will be in retirement, because once you’ve bought an annuity you can’t change it. That means it’s very important to shop around for the best rates.
Don’t forget, once you have made the commitment, it’s irreversible.
Head of pensions at Drewberry
Can you cash in an annuity?
There was much hype around plans floated by the Treasury in 2015 that proposed letting annuitants exchange their annuities for cash lump sums. The proposal was in response to those who had already bought annuities and were disappointed that new retirees did not have to buy annuities when they did not have the
However, following the change in government in the wake of the Brexit vote, the plans have been scrapped with no apparent intent at this time to revisit them in the future.
How are the rates for impaired life annuities calculated?
The annuity rate you are offered is based largely on how long the insurance company expects you to live. The longer the insurer expects you to live, the lower your annuity income will be. Conversely, if your have an impaired life expectancy, you might be offered an enhanced annuity with a higher income.
What do annuity companies use to calculate annuity rates?
Annuity companies examine mortality rates for people in good health and for those who have medical conditions. Rates are also decided on a range of other factors, such as your age and even where you live.
Economic variables also impact the rates paid, with insurers factoring in the yield on government gilts, the interest rate environment and competition between providers.
Some annuity companies specialise in offering competitive rates to people with medical conditions. So it may be that the company with the best headline standard annuity rate is not necessarily the one which will come up with the best deal for you. That is why it is important to shop around.
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Who qualifies for a enhanced annuity?
If you have any of the following conditions, you may qualify for an enhanced annuity:
- heart disease
- high blood pressure
- kidney failure.
Other conditions that may qualify, depending on the insurer and the seriousness of the condition, including asthma, high cholesterol and obesity.
How much of an enhancement you’ll be offered over the annuity the insurer would have given a healthy person depends on the severity of your condition.
The annuity company might look at the type and stage of your cancer, for instance, while a person who has suffered multiple heart attacks will most likely get a higher rate than someone who has had a single heart attack.
Other criteria that could qualify…
As mentioned, you may also qualify for an enhancement if you’re a smoker. Some providers might offer more competitive annuity rates to people who suffer from asthma or obesity, for example, so it’s always worth checking whether your condition is covered.
If you have an adviser, they can help you shop around for an annuity provider who will offer you a competitive deal.
Although you will need to provide details of your condition, and may need a doctor’s report to support your claim, it’s unlikely that you’ll be required to go for a medical examination.
Joint impaired life annuities for couples
If your partner depends on you financially you could consider a joint life enhanced annuity. This would ensure that the income provided by the annuity would continue to be paid to your spouse or partner even after you have died.
The rate you are offered will depend on the state of your health and that of your spouse. If they are in good health the rate may be slightly lower, but it will still most likely be above the standard offer that would be available if you were both in good health.
Choosing an annuity is not the only option, however. Under the new pensions freedoms there are a number of alternatives, including making regular withdrawals from your fund, which might work better for you.
It is worth discussing this with your adviser, and being open and honest about the health conditions that you face. That way, they can help you think about the different options available, and enable you to make the right choice.
Most people have saved for many years into their pension fund, and choosing an annuity is a big financial decision and life-long commitment.
That’s why it’s a good idea to give yourself time to think about what is available, so that you make a decision that is best for you and your dependents.
Your adviser will help you familiarise yourself with your options for an income in retirement, which may be something other than an annuity, and guide you through the process.
Pension Adviser at Drewberry