Impaired life annuities

Although this may sound a rather unpleasant topic it is something that everyone should think about because even if they are in perfect health, some people could enhance their retirement income by shopping around.

Ill health can produce a higher annuity

For a long time, it has been possible for those who are in ill-health, when they come to retire, to secure a larger income by going to one of the specialist insurance companies who are prepared to grant a higher annuity to those whose life expectancy is foreshortened by ill health.

This is perfectly logical, because an annuity is intended to provide an income for life (based on the capital available to buy it). If the individual has a severe medical condition that means they are expected to die earlier than would normally be the case for a person of the same age, then the insurance company can afford to pay out more, for a shorter period.

In fact, this principle has more recently been extended, by one or two companies, to reflect the fact that life expectancy varies in different parts of the country and it is now possible for those in ostensibly good health to secure an enhanced annuity from some providers simply on the basis of where they live.

Open market option
This throws into sharp relief a point that insurance companies do not seem keen to draw to policyholders’ attention; almost everyone has the right to search the market for a better deal than that offered by the company which built up the retirement pot in the first place.

The difference between the best and worst annuities on the market can be considerable and an extra 5% or 10% can certainly mount up over the years.

It is important also to consider the type of income that is required. Purchasing an indexed annuity, or one that is payable on a joint-life basis for husband and wife (or for civil partners) will reduce the amount payable initially, but could prevent problems later on, should the income cease on the death of the annuitant, leaving a surviving spouse unprovided for, or fail to keep up with inflation.

Finding the right deal can take time

Guaranteed Annuity Rates
Some older pension plans offer what is called a guaranteed annuity rate that is much higher than those generally available today (although when first offered, they were far from generous against the then current market).

Exercising your open market option will entail sacrificing the guaranteed rate. However, this normally only applies at a set age (frequently 65) and will not include either a spouse’s pension or any form of indexation. It is, therefore, unlikely that this will be practical in many cases. It is, however, something that should be considered.

Finding the best deal
There are so many insurance companies – and different options – on the market that it is difficult for many individuals to find the retirement income that is most suitable for them. It is, therefore, essential to take independent professional advice because even on a modest pension fund, the increased income that could be secured can make a little effort worthwhile.

It is important always to seek independent financial advice before making any decision regarding your finances. For further information, please contact us. As ever the value of investments is not guaranteed and will fluctuate; you may get back less than you put in.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND. 

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