If you're approaching retirement, it goes without saying that you'll want to maximise the income you receive. You'll have a lot of years ahead with no salary to fall back on, and that's why many people choose to opt for annuities. Doing so gives a guaranteed income for life, regardless of how long your retirement lasts, but there's one key way to potentially boost your income even further – by opting for enhanced annuities. But, could you qualify?
Let's start by looking at what an enhanced annuity actually is. Put simply, it's a financial product that will give those who have a specific medical or lifestyle condition a higher – or enhanced – monthly income. It's based on the assumption that those with qualifying conditions will have a shorter life expectancy than retirees without such complaints, so the provider can "afford" to pay you more for that shorter time period.
Of course, there's a trade-off, much like with a standard annuity. If you live for fewer years than expected then the provider will benefit as they won't need to pay out so much (and will still keep your pension pot), but if you live longer than anticipated, the provider will end up paying you more than your pension pot was initially worth. This is why it's always best to go for an enhanced annuity if you qualify, because with higher monthly payments, you'll benefit whether you beat expectations or not.
So, will you qualify? There are a whole range of conditions that will be considered for enhanced annuities depending on your provider, ranging from certain cancers to Alzheimer's and even high blood pressure, so it's important to thoroughly discuss things with your provider to see the kind of quote they can offer.
To get an idea of whether or not you'll be eligible, MGM Advantage has looked into the matter and revealed the top 10 conditions that they provided enhanced annuities for in October 2014. These are high blood pressure, smoking, high cholesterol, type 2 diabetes, asthma, angina, mini stroke, atrial fibrillation, chronic obstructive airways pulmonary disease, and depression.
Andrew Tully, of MGM, commented: "Many commentators have predicted the early demise of the annuity. However, for many people, the prospect of a secure, guaranteed lifetime income continues to remain attractive. So we should encourage anyone looking for an annuity to consider the right shape and type of annuity, and then secure the best rate.
"Unfortunately, far too many retirees are unaware of the significant boost in retirement income they can receive by disclosing health conditions and shopping around for the best deal. A professional financial adviser will be best placed to provide the advice required to navigate the retirement income maze and ensure not only the right solutions but the best value is obtained by the retiree."
It's certainly true that you can get more from your money if you qualify for an enhanced annuity. For example, Moneyfacts figures show that if you purchased a standard annuity with a pension pot of £50,000, you'd currently achieve an average annual income of £2,799. But, if you qualified for an enhanced annuity, this figure would rise to £3,349, so it makes sound financial sense to check your eligibility.
However, despite the enhancement, annuity rates have fallen across the board in recent months. The figures show a significant drop in rates during the third quarter of 2014, a pattern that was continued into October. Overall, the average income payable from a standard annuity has now fallen by 4.6% since the start of the year, and by 2.5% for an average enhanced annuity – but it's the Budget that's made the biggest difference. From April next year there'll be no obligation for the majority of pensioners to buy an annuity, something that's understandably reduced demand, and rates have followed suit.
"Annuity rates are at their lowest level since July 2013," said Richard Eagling, head of pensions at Moneyfacts, largely thanks to the much lower demand for such products post-Budget. "The pension proposals [aimed] to unleash greater freedoms, but for those still looking for the security of an annuity, they have also inadvertently lowered the incomes payable."
That makes it more important than ever to thoroughly consider all your options. The new pension flexibilities mean retirees have more choice than ever when it comes to spending their pension pot – buying an annuity was once the only option for a lot of retirees with certain pot sizes, but now alternatives (such as income drawdown or even withdrawing the lot) are becoming viable, but it's still essential to make sure you find the solution that's right for you.
Despite the drop in rates, annuities are still the only option if you want to secure a guaranteed income throughout retirement. Rates vary widely between providers, too, so you'll want to head to the open market to compare quotes – don't automatically go for the product offered by your pension provider, as chances are, you could get a better rate elsewhere. Speak to the professionals to maximise your chances of finding the product that's right for you – get the process started by consulting our no-obligation annuity service – and remember to disclose any medical conditions you're suffering from to see if you can give your income a boost.
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Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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