Are you eligible for an enhanced annuity?
While medical problems and bad habits like smoking typically mean you pay more for life, health and travel insurance, when it comes to annuities it pays to 'fess up to vices and conditions that affect your wellbeing.
Contrary to popular belief, you don't have to be seriously ill to be eligible for an enhanced annuity. Smoking, drinking and being overweight could all get you a better annuity rate and boost your income in retirement, along with other, potentially minor, health complaints.
Seven out of 10 eligible
According to annuity provider, MGM Advantage, some 70% of retirees could qualify for an enhanced annuity as a result. Andrew Tully, pensions technical director, explains: "Six or seven years ago you might have only got an enhanced rate if you had a serious illness like cancer. Now high blood pressure, or high cholesterol and smoking could make you eligible. Quite often people have more than one of these issues and it's this combination that can really make a big difference."
Hargreaves Lansdown says the five most commonly occurring health factors that are inputted into its enhanced annuity service are: hypertension, high cholesterol, height and weight factors, smoking and diabetes; and, according to its research, a smoker with high cholesterol and blood pressure could get a whopping 47% boost to their retirement income.
Value of advice
The problem, however, is that most people are simply not aware of their options at retirement. According to LV= just 22% of over-50s know that they don't need to buy their pension from their annuity provider and only 16% realise that declaring health and lifestyle factors such as high blood pressure and smoking can mean they get a better income in retirement.
Tully adds: "The vast majority of take up of these plans is through advisers, which tells its own story. If you take advice you are more likely to get an enhanced annuity."
As enhanced annuity rates are based on life expectancy, the more severe your health problems, the higher the income you will receive. So while a healthy 65-year old would get an income of £495 a month (based on a £100,000 pension fund) a smoker would get an extra £33 a month according to MGM Advantage.
If they smoked and had high blood pressure they'd £48 more a month, if they had diabetes with high blood pressure and high cholesterol they'd get £57 more a month, while diabetes with complications would get £105 extra each month. If they had a more major health condition, lung cancer for example, they would £253 more every month.
Serious health problems
However, retirees with very serious health problems are advised to consider their income options very carefully as you could potentially lose much of your capital with an annuity and you may prefer a route that makes it easier to leave money to loved ones.
Laith Khalaf, head of corporate research at Hargreaves Lansdown says: "If you don't need the income, from a finance and tax point of view it makes sense not to touch your pension at all. If you don't draw any of your pension and die before you are 75 your capital will be passed to your beneficiaries tax-free."
Alternatively if you need the income you could explore a drawdown arrangement and still take your 25% tax-free cash. Upon your death any remaining capital could be converted into an income for a spouse or dependent (either by way of drawdown or annuity) or it could be taken as a lump sum, less a 55% tax charge.
While drawdown might be the more flexible option Khalaf says you shouldn't write off annuities altogether. "It's still worth getting enhanced annuity quotes, if your life expectancy is very short that should be reflected in the quote."
More options are available to the terminally ill, adds Khalaf. "If you have a diagnosed life expectancy of less than a year you can take your pension as a lump sum. There is no immediate tax, but the money would form part of your estate for IHT purposes once you died."
Which option is ultimately right for you will depend upon your need for income, the severity of your health problems and the needs of your family. As Khalaf says: "You need to investigate your options thoroughly and if necessary take advice."
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.