Helping you keep your finances healthy!

Answer: When you’re over 55.

It’s an odd concept, isn’t it, but the more ailments and bad health habits you have when you’re about to retire, the larger your income should be in retirement.

Yet an amazing proportion of British retirees are missing out: only one-sixth of those who would qualify for a bonus income are actually getting them. Worse still: these deals, once struck, are the once-in-a-lifetime kind.

Just imagine living on a meagre pension for a few years, scratching your head when bills arrive… then finding out you could have been up to 26% better off in that time—even with exactly the same pension pot.

It’s all to do with products called annuities (see below for an explanation, or read our guide to annuities). There are ‘standard’ annuities, and there are ‘enhanced’ annuities, the kind that pays an extra income to those with health problems.

Why don’t more people benefit from a better deal on their retirement income? Are over-55s not willing to own up to their illnesses?

Or are insurance companies quite happy to keep them in the dark about this opportunity?

What’s an annuity—and why are some ‘enhanced’?

If you’ve never heard of annuities before, take note: most of us will buy one sooner or later, and when you do, it’s one of the biggest financial decisions you’ll ever make.

It’s when you cash in your pension fund for good, in return for an income in your old age.

There’s an obvious reason for annuities to exist: even if you withdrew all your pension pot in one go, you’ve no idea at what rate you ought to spend it. Simply put, you don’t know how long you’re going to live.

Annuity providers, however, reckon they’ve got a good statistical chance of figuring out, on average, how long someone like you should live (give or take a year or two).

So they offer you the chance to use your pension pot to buy an income that lasts for the rest of your life. That product, and the rate they offer you, is called an annuity. If their calculations are right, they profit; if not, you do. Live longer than they suppose you will, and you’re in the money.

But it’s those that are likely to live shorter that need to pay attention.

That’s because they’re likely to get short-changed by a standard annuity—and research from annuity provider Just Retirement shows that nearly half of eligible retirees still do.

‘Enhanced’, or ‘impaired life’ annuities have been available in the UK since 1995 and are designed for those with a shorter life expectancy. Basically, they allow you to take a larger income, equivalent to spending your pension pot more quickly, on the basis that you’re likely to, shall we say, not need it any more, perhaps a little sooner than others. Or to put it delicately, as per Just Retirement’s press release:

“They pay higher rates than standard annuities due to the assumption that those in poorer health will have a shorter life expectancy”

And you’ll be amazed at what minor health conditions, even habits, could affect your statistical life expectancy and therefore make you richer in retirement.

What qualifies you for an impaired-life annuity?

Serious conditions like cancer are an obvious factor, but rates can be enhanced for a whole range of milder or less serious conditions.

Imagine realising you could have qualified for the following pay rises:

• Eight per cent a year if you had high cholesterol or blood pressure
• 18 per cent a year for diabetes
• 26 per cent a year for being on medication following a heart attack within the last five years
• Even smoking and drinking alcohol could earn you a boost (they didn’t say how much)

But the most astonishing statistic is the gap between the number of people with established health problems and the few who take enhanced annuities.

Case in point: the Office of National Statistics’ General Lifestyle Survey 2008 showed that 39 per cent of people aged between 45 and 64 said they had a long-term illness. This increases to 67 per cent of people aged over 75. Yet only 10% of annuities sold are of the ‘enhanced’ kind.

In other words, huge numbers of pensioners are missing out. And the sums at stake aren’t small: that 26 per cent boost in income could be worth thousands and thousands over the years.

So why don’t we own up and qualify?

That’s a truly perplexing question. I’m waiting for the research study that says, “Over-55s don’t like telling the truth about their health”. But I don’t suspect that’s the full story.

It could be simply that people don’t know enhanced annuities exist. Even though they’ve been around for fifteen years, they’re still a little bit niche: only a handful of providers currently offer them, namely Aviva, Canada Life, Just Retirement, Legal & General, LV=, MGM Advantage, Partnership, Prudential and Reliance Mutual.

The other companies who don’t offer enhanced annuities, of course, would be quite happy for you to be kept in the dark. And really, there’s no incentive even for those above-named companies to shout about enhanced annuities to any customers in their queue that are willing to be sold a standard product instead.

So diligence is certainly the best policy. But so is honesty; and who would have expected that?

After all, if we’ve been used to answering questions from insurance companies where the slightest admission of poor health results in a higher premium, perhaps we’re conditioned to bend the truth a little?

If that’s the case, it’s sad — because the trouble with buying annuities is that they’re a once-in-a-lifetime financial decision.

And finding out you could have qualified for a better income after the event might be like realising you put that winning lottery ticket out with the recycling!

Get annuity advice

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