A bit morbid we know, but this tool works out the risk of you passing away based on ONS Life Expectancy Data
One option to secure an income in retirement is to buy a lifetime annuity by exchanging some or all of your pension savings for an income. This income is guaranteed and secure for the rest of your life.
With a single life annuity, unless you’ve opted for capital protection, your loved ones won’t receive anything if you pass away. That means if you die before receiving all of your pension pot back as an income you lose out.
Of course, if you live long enough to receive more in annuity income than your pension pot was worth initially you’ve done well. The annuity company still has to keep paying you for the rest of your life, even if that’s long after your original pension pot would have run dry.
Your annuity rate will be based on a number of factors, including your age, location, state of health and whether you want your annuity payments to be fixed or to rise in the future. For the latter, you can index-link your benefit so it rises 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.
Annuity rates have fallen as life expectancy has increased. Underlying economic factors, such as low yields on government debt and low interest rates, have also kept rates low. Insures have cut rates to lower the risk of them still paying out after a person’s pension pot has been exhausted.
One other factor that’s important when calculating annuity rates is your health. You may find that you can get an enhanced annuity if you have a medical condition that impairs your lifespan. This is why you’ll sometimes find an enhanced annuity referred to as an impaired life annuity.
If you’re entitled to an enhanced annuity, it will increase your annuity rate over and above what would be offered to a standard annuity applicant because the assumption is that you’ll be receiving annuity income for less time.
Some annuity companies specialise in offering enhanced annuities to those 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.
Your annuity rate is based largely on how long the annuity company expects you to live. The longer the insurer expects you to live, the lower your annuity income will be. Conversely, if you have an impaired life expectancy, you might be offered an enhanced annuity with a higher income.
Having a serious medical condition counts against you when you’re buying Life Insurance because insurers see you as a greater risk. The same is true if you smoke, because of the negative impacts tobacco use has on health. That means you’ll pay more in premiums.
However, an annuity works effectively like Life Insurance but in reverse. Instead of paying regular premiums and receiving a lump sum on your death, with an annuity you start with a lump sum and receive regular payments until you die.
So when it comes to converting your pension pot into an annuity, you could increase your income if you have a medical condition. This is because the likelihood is you’ll be receiving annuity income for less time compared to a healthy individual, so the provider is willing to offer you a higher income.
If you have any of the following conditions, you may qualify for an enhanced annuity:
Other conditions that may qualify, depending on the insurer and the seriousness of the condition, including asthma 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. If you have more than one medical condition, you may qualify for a further enhancement due to the higher risks associated with comorbidity.
For instance, the annuity company might look at the type and stage of your cancer before deciding the annuity rate to provide to you. Meanwhile, a person who has survived multiple heart attacks will most likely get a higher rate than someone who has had a single heart attack.
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.
You may also qualify for an enhancement if you’re a smoker. This might especially be the case if you’re already suffering from the health effects of smoking, e.g. lung cancer, heart disease, chronic obstructive pulmonary disease etc.
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 offered will depend on the state of your health and that of your spouse. If, unlike you, 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.
Broadly speaking, if you’re ill and you’re looking for a secure income for life it may well be that this is the right option for you because an annuity will never run out, and being ill you’ll likely get an enhanced yearly payout.
Of course, if you have a very limited life expectancy then locking yourself in to a long-term financial product may not make much sense. Even with the enhancement, it could be a number of years before you receive back in income what you paid in. In this instance, putting your pension pot into a drawdown fund could be a better option.
Pension drawdown allows you to draw on your pension pot with your own flexible schedule of lump sum and income payments. What’s more, it allows there to be cash leftover on your death that you can pass down to your family.
If you die before the age of 75, your loved ones can inherit your pension totally tax-free. If you die after the age of 75, then they pay income tax on the inherited pension pot at the normal rate.
Pensions are not typically subject to inheritance tax, so they can actually be an incredibly tax-efficient way to pass income down generations. This is compared to an annuity, which stops on your death or, if you have a joint annuity, on your partner or spouse’s death.
For those with a very compromised life expectancy who need to turn their pension pot into cash, a drawdown fund could be a better option than an enhanced annuity. This is particularly true if you have beneficiaries you’d like to leave your pension cash to. However, its impossible to say which would be the best option for you without knowing your circumstances. That’s why it’s so vital to get the professional opinion of an expert. The team here at Drewberry is here to help you make such a big decision.
Senior Paraplanner at Drewberry
Most people have saved for many years into their pension fund. Choosing between drawdown and an annuity is a big financial decision. That’s why it’s a good idea to give yourself time to think about what is available so that you make the best decision for you.
Your adviser will help familiarise you with your options for an income in retirement and guide you through the process. They can help you compare annuity quotes across the market to get you the best deal. Speak to an expert today on 02084327334 to discuss your retirement needs.
Pension Adviser at Drewberry