Updated 23 January 2017
If you have a health condition or certain lifestyle issues, you may be entitled to more money in retirement. Currently around 1 in 5 who buy an annuity manage to get this ‘enhancement’ – but there’s evidence that three times as many people may qualify. Could you?
An insurance company asks you ‘How’s your health?’ and usually your heart sinks. If you have any existing medical conditions, or if you smoke, you already know they’re going to clobber you with higher premiums. Unless, that is, they’re selling you an annuity.
When you buy an annuity – a guaranteed retirement income for life – everything tends to be the other way around. Why? Because of the way insurance works. To put it bluntly, when you take out life insurance, you are ‘betting’ the insurance company that you will die prematurely (because your family stands to ‘win’ a large sum of money if you do). Meanwhile the insurance company is ‘betting’ that you will live a long time, because then it stands to ‘win’ all your premiums over the years.
But with an annuity, the opposite is the case. This time, you are betting that you will live a long time, so that your insurer will have to keep paying out. So it follows that your insurer will gain more if you die sooner than expected.
This means that when you buy an annuity, you should look for anything that might seem to tip the odds in the insurer’s favour, and so make it a ‘better bet’ for them. The most common way for this to happen is if you have a health condition or lifestyle that may reduce your life expectancy – such as smoking, or a chronic or progressive illness.
Are the odds stacked in your favour?
The gambling analogy might seem crude, especially when the subject is living or dying – but it’s the easiest way to understand how enhanced annuities work. To take out an ordinary annuity, you hand over a lump sum (usually some or all of your pension pot) and in exchange receive regular payments for the rest of your life. If the insurer has good reason to believe you may die prematurely, it can afford to offer you higher payments for the same initial lump sum.
This would mean you are entitled to an ‘enhanced annuity’. If you are living with any of the following medical conditions, you could qualify for one.
Various lifestyle factors also apply, such as the aforementioned smoking. However, do note that this means smoking at least 10 cigarettes a day for the past 10 years – so no-one should be tempted to take up smoking just in the hope of getting a better annuity. Other factors can include your Body Mass Index (i.e. whether you are overweight), your alcohol intake, family circumstances (e.g. carers may qualify) and even where you live (some postcodes are known to be associated with poor health).
In short, all those frustrating factors that would count against you when taking out life insurance, now work in your favour when taking out an annuity. Many factors are also cumulative – for instance, if you are a regular smoker, drink more than 50 units of alcohol per week and are also overweight, every one of these may increase your annuity entitlement by a little more. Even having a spouse with health problems can lead to enhancements, regardless of your own level of fitness. Together, multiple factors can add up to a sizeable increase in your regular payments.
Two out of three annuity holders may be missing out
Currently around 20 per cent of annuities sold are enhanced annuities. However, there is evidence that this figure should be far higher. Industry data indicates that approximately 60 per cent of all annuity applicants could qualify for some form of enhanced annuity.
Recently the FCA has awarded compensation to around 90,000 individuals who were sold standard annuities by their providers, without being informed that they might qualify for enhancement. This mis-selling occurred when individuals spoke to their providers on the phone and were not told about their range of options or that they could shop around. On average these individuals became entitled to between £120 and £240 for every year that they held their unenhanced product.
So might you qualify for an enhanced annuity? And how do you find out? The best way is to engage your own independent financial adviser, to prevent any conflict of interest. Your adviser will ask you all the relevant questions about your health and lifestyle, and will explore all the other factors that may help to enhance your annuity, ensuring that no opportunity is missed. The adviser can also search the whole marketplace to find the best product for you. In most cases, the difference in the size of the annuity will more than pay for the cost of the advice within just a few years.
To find an adviser to help you buy the very best annuity available to you, use the Unbiased smart search.