65% of you can boost your pension this way

If there was a way to boost your pension income by a quarter, wouldn't you want to know about it?

One of the most important financial decisions you’ll ever make is choosing how to take your pension benefits when you retire. The chances are, like most people, you’ll buy an annuity which converts your pension pot into a regular, guaranteed income for the rest of your life.

The amount you’ll actually receive is influenced by many factors, but not least by prevailing annuity rates at that time. This is way it’s so important to exercise what’s known as the Open Market Option (OMO). Quite simply, the OMO refers to shopping around for the most competitive annuity you can find to secure the highest possible pension income.

These days the odds are stacked against people who are on the verge of retiring. Pension fund values are deteriorating alongside dwindling annuity rates. These two factors conspire together to decimate your pension income.

But all is not lost. As well as using the OMO to find the most generous annuity provider you can, the type of annuity you choose will also have a dramatic effect on your pension income.

Smoker annuities

You may already know that if you smoke, you should apply for a special smoker annuity which offers a higher level of pension income. This is simply because smokers are deemed to have a lower than average life expectancy, therefore annuity providers will pay better rates to compensate for the fact that the annuity will likely be paid for a shorter period overall.

To illustrate this point, the most competitive standard annuity will provide a 65-year old man with a pension income of £6,380 a year based on a pension pot worth £100,000. But if the same man chose today’s top smoker annuity, instead of a standard annuity, his income would increase to £7,240 a year.

In other words, he’ll enjoy an extra £1,040 every single year for the rest of his life. That’s quite a handsome reward in return for looking beyond standard annuities.

Enhanced annuities

But the potential for increasing your annuity doesn’t stop there. In addition to smoker annuities, specialist enhanced annuities also offer an income uplift for those who suffer from certain medical conditions which affect their life expectancy.

At the moment, just 12% of all annuities purchased are enhanced. But annuity provider, Just Retirement estimates that many more of you could qualify for the higher income enhanced annuities provide. In fact, the company said as much as 65% of people who are due to retire have conditions which could boost their pension income.

Your medical history

It’s a huge concern that many of you don’t realise how important your medical history is. If you don’t declare it to annuity providers, you could inadvertently miss out on a much more generous retirement income.  

Even seemingly mild medical conditions can be taken into account by annuity providers when they decide the rate they are prepared to offer you. In fact, there are over 1,500 conditions which can make you eligible for an income enhancement.

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This includes conditions such as high blood pressure, high cholesterol and diabetes as well as lifestyle factors such as high alcohol consumption and obesity. Of course, more serious conditions including certain types of cancer and heart disease can lead to even greater enhancements where life expectancy is likely to be significantly lower than average.

More than 60% of men aged between 65 and 75 have raised blood pressure. This factor alone won’t necessarily equate to an income enhancement, but when taken in combination with other lifestyle or medical conditions, it can increase annuity income. Meanwhile, a high level of blood pressure which requires medication will likely lead to an income uplift by itself.

Remember standard annuities are effectively a one-size-fits-all product where the rate will be influenced by age and gender (as well as investment conditions and interest rates at the time) and completely ignore your personal circumstances beyond that. But an enhanced annuity provider will provide a more tailored annuity which normally provides much better value.

How much extra income could you get with an enhanced annuity?

The table below compares the income you could take from a standard annuity - where you haven’t declared your state of health and medical history - with the income from an enhanced annuity based on various combinations of medical conditions. The figures are based on a pension pot of £60,000 for a 65-year old man:

Standard versus enhanced annuities

Source: Just Retirement

As you can see from the table, depending on the severity of your medical conditions, you could increase your pension income by as much as 25% above and beyond the payout generated by a standard annuity. Again, this is a hefty reward in return for the relatively easy task of shopping around.  

In fact, if you compared the figures you could get from an enhanced annuity against the annuity offered by your existing pension company, you could enjoy an even greater uplift (given that your pension company probably won’t offer the most competitive standard annuity rates).

So, don’t forget, if you’re retiring soon you should be able to step up your income by completing a medical questionnaire to declare your medical history to an annuity provider or your financial adviser. The enhanced annuity market is still relatively small, but the following providers will take your lifestyle and/or medical history into account:

• Aviva (smoker)
• Canada Life
• Just Retirement
• Legal & General
• LV=
• MGM Advantage
• Partnership
• Prudential
• Reliance Mutual

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