For most investors approaching retirement their pension planning has probably been, up to that point, a relatively straightforward equation. How much can I afford to pay into my pension, when do I pay it and what funds do I invest in? There is of course the small matter of how well the funds perform (a subject close to all our hearts) but the objective is to hopefully amass a sufficient retirement fund without taking too much risk.
It’s only once you get to retirement that things can start to get a lot more complicated with an array of different solutions available – such as annuity or income drawdown. For most people the default option they get presented with by their existing pension provider is an annuity. Having spent many years battling against volatile markets, this “non-invested” option can seem appealing with the income guaranteed irrespective of what the stock market might throw at you.
An annuity is essentially a bet made by the insurance company on how long they statistically believe you will live. If you beat the odds and live a long time then you get back more than if you had placed your money in a low risk investment and stripped out the entire fund as income. If you die early then the balance of your fund is, to all intents and purposes, used to cross subsidise those who live on. Whether this is a fair system rather depends on which side of the grave you are standing on.
The problem is that annuity rates are currently at their lowest ever levels and the income that you get, whilst guaranteed for life, may be insufficient to provide the standard of retirement you had once hoped for.
There are other alternatives to an annuity, such as income drawdown, which involve remaining invested and stripping out an income but another possibility that could increase your income, without the ongoing investment risk, is through the use of enhanced annuities.
Unfortunately because they are often referred to as “impaired life annuities” a large proportion of retirees are dismissing them in the misguided belief that they will not qualify for any enhancement.
Insurance company actuaries can be a morbid bunch but they view any health or lifestyle issue that potentially reduces your life expectancy as a possible reason to enhance your starting annuity on the basis that they may not have to pay it to you for so long.
Quite how little it takes to qualify was highlighted in a survey carried out last year by MGM Assurance. They found that more than 70% of those approaching retirement who were considering an annuity could be missing out on a potential enhancement.
Whilst the more serious conditions will result in the largest improvements it’s not just about life threatening conditions. Just taking prescription medicine or recent visits to hospital for a medical condition could result in some improvement to your rate
If you are overweight, have high blood pressure or high cholesterol you could see your income increase by an average of 7% compared to a standard annuity.
Just smoking more than 10 cigarettes a day for at least 10 years could increase your annuity by up to 16% and in some cases those that are very seriously ill have received enhancements in excess of 30%.
There are today many methods of creating an income in retirement and with some, such as annuities, once you have made the decision to use them there is no going back. If you are approaching retirement seek some independent financial advice, fully investigate all the potential solutions and where possible take advantage of every enhancement open to you.