If you want to take out an annuity, where you turn your pension fund (or part of it) into an income for life, you could get a higher amount every year if you’re ill or have a medical condition – even if it’s controlled by medication. In that case, you should buy an ill health or enhanced annuity. Find out why.
News update: 15th October 2016
The financial regulator, the Financial Conduct Authority, says that 90,000 people could have missed out on an enhanced or ill health annuity. It looked at the way annuities were sold between 2008 and 2015 – where someone bought an annuity from their existing pension provider. The FCA said that in some cases people with health issues were not told they could shop around or that they may qualify for a higher income for life with an enhanced or ill health annuity.
In some cases, pension providers that don’t offer enhanced annuities didn’t tell their customers that these were available – or if they did, they didn’t explain that buying one could mean a higher income for life. The FCA does not name the pension providers involved, but if you’ve been affected your pension provider should contact you direct.
SAVVY TIP: Pension companies that didn’t treat customers fairly have been told by the regulator to compensate people.
Understanding an ill health annuity or enhanced annuity
There are around 1,500 different illnesses or lifestyle conditions that could mean you receive a higher income than someone on a standard rating (who is healthy).
There are two types of annuity that may pay you a higher income every month based on your lifestyle or health:
1. Enhanced annuity: this will pay you more if you’re a smoker or are overweight, for example.
2. Impaired life or ill health annuity: this will pay you a higher income if, for example, you have high blood pressure or have had a stroke or cancer.
How much more could you get?
It’s a bit of a ‘how long is a piece of string’ type question as the answer depends on how serious the condition is that you’re suffering from. Tom McPhail of financial advisers Hargreaves Lansdown, which has an annuity broking division, says it could be from 10% more to 50% more income each year.
Here are some examples:
1. Smoker: 10% more income each year for life
2. High blood pressure and high cholesterol: 21% more
3. If you’ve had a heart attack: 29% more
4. Insulin dependent diabetes taking one other medication: 33% more
5. If you’ve had a stroke: 35.5% more
SAVVY TIP: The gap between the amount you’ll receive from an enhanced annuity and a standard annuity has reduced, in some cases. That’s mainly because we’re living longer even after suffering from a serious illness. But the difference between the enhanced and standard rates can still be significant, as the examples illustrate.
Before you retire
You no longer have to buy an annuity. But if you have a serious health problem, it may mean you’ll get a higher income than if you – for example – put your money in a savings account or invested it. Don’t discount the idea of buying an annuity just because the pension freedoms introduced in April 2015 mean you no longer have to do it.
SAVVY TIP: Your pension company will send you what’s called a ‘wake up pack’ several months before your chosen retirement date. It will tell you – among other things – about the advantages of shopping around for an annuity (the clumsy phrase that describes the process is the ‘open market option).
- Shop around. Don’t — under any circumstances — take the pension payment you’re offered from the company you’ve saved with without finding out whether you could get more elsewhere.
SAVVY TIP: The only exception to this is if you have a pension with what’s called a ‘guaranteed annuity rate’ (they tend to be offered with pensions taken out a good few years ago). In this case you may be better off sticking with your pension company.
When you shop around for an annuity
The company you’re shopping around for your annuity with should ask you three key questions:
– Do you smoke?
– Are you taking prescription medicine?
– Have you been to hospital recently?
SAVVY TIP: You should start shopping around for an annuity several months before you retire as the process can take longer than you think. Billy Burrows of William Burrows & Retirement Intelligence says that medical information you provide should be valid for six months. “If you have a retirement date in six months, there’s no harm in seeing if you qualify for an enhanced annuity sooner rather than later. It’s a good idea to get a quote earlier because you can act if annuity rates look like they’re about to nosedive.”
What you’ll have to do
Some annuity brokers will ask you to fill in a form (it’s called a ‘medical detail form’), which can be quite long — up to 20 pages. Although you shouldn’t have to fill in all of it, some people find it quite off putting. A number of annuity brokers are starting to use specialist companies that employ trained nurses to take details over the phone which is then passed onto the annuity provider. There are advantages to this approach, says Billy Burrows, of William Burrows & Retirement Intelligence:
- More people end up with an enhanced/impaired life annuity. This is because the trained nurse will get better information (by asking follow up questions) and will be able to make a link between medication or illnesses that a financial adviser — and the customer — may not make.
SAVVY TIP: Morgan Ash, one of the companies providing this telephone service, says that many people talk about their own health in a subjective way. Someone who has high blood pressure but is taking medication to control it may not see themselves as suffering from high blood pressure and could miss out on higher rates as a result.
- It’s more user friendly. Most of us aren’t used to volunteering our detailed medical history to a stranger. And if your annuity broker is someone you know that may not make it easier either.
- The annuity provider receives a detailed report written in medical/technical language. The more information the annuity underwriter has, the easier it is for her or him to make a decision on how much to pay someone. If the report is very precise, and with a lot of background information, it can result in a higher payout because there are fewer grey areas.
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