Annuities Explained

Unlike with traditional insurance applications where medical conditions and unhealthy lifestyle choices usually end up costing us more, when purchasing with a lifetime annuity with your personal pension funds, disclosing any health conditions you have could work in your favour…

If you have been diagnosed with an illness that could reduce your life expectancy, you are overweight or smoke, you may be eligible for what’s known as an ‘enhanced annuity’. An enhanced lifetime annuity means you receive a higher income compared to a basic rate annuity and is paid for life even if your health improves or you change your lifestyle.


Can I get an enhanced annuity?

When you apply for an annuity, the provider will assess your life expectancy based on your health and lifestyle. It may be easier than you think to qualify for an enhanced annuity, and many of the conditions that entitle you to extra income are common in later life, such as high blood pressure and diabetes. Being overweight, smoking and drinking alcohol regularly could also qualify you for enhanced rates and more income.

Examples of health problems and lifestyle choices that might entitle you to a higher income include:

  • Smoking
  • Obesity
  • Diabetes
  • High blood pressure
  • Heart disease
  • Cancer
  • Kidney failure
  • …and many more

These are just some conditions that could secure you a higher income. If you are on prescription medication, it may be worth checking with your provider about whether you are likely to qualify. You may have to provide supporting evidence from your doctor to prove to your provider that you are living with certain health conditions, so always be honest.

To avoid delays, providers may carry out health checks after your annuity payments have commenced. If the information you provided at the time you took out your annuity is not verified by your doctor, your income amount could be reduced.


How much extra will I receive?

Each provider will have their own way of calculating how much income you will receive, but generally the uplift in income you’ll receive will depend on the severity of your condition and the impact it could have on your life expectancy.

To give you an example, you could get as much as 30% extra income if you have diabetes, 31% more if you have a history of heart attacks and 15% more if you are considerably overweight. If you have multiple health conditions, these could be grouped together to result in considerably more income, so make sure you list every medical condition you have.


What happens to the money in an annuity when I die?

Typically, when you die, your annuity income payments will stop, and no money will be returned to your loved ones. You can, however, add certain features to your annuity that could ensure you leave something behind after you die. These features can include value protection or guarantee periods, or you could choose to take out a joint-life annuity. You can find out more about these features on our guide ‘What happens to my annuity after I die?’


How can I get the best enhanced annuity rates?

If you are interested in buying an enhanced annuity, it is important to shop around the whole of the market for the best possible deals. 60% of people stay with their current pension provider when buying an annuity, but as many as 8 out of 10 of these people could have secured a higher income by switching.

It’s worth bearing in mind that the annuity rate set out when you purchase your annuity is fixed, so even if annuity rates increase in the future, you will not benefit from additional income. However, if annuity rates fall, you are protected from a potential decrease in the income amount.

Annuity Ready can help you compare quotes from annuity providers across the whole annuity market including Aviva, Canada Life, Hodge, JUST, Legal & General and Scottish Widows, helping you to secure a potentially better deal than the one offered to you by your pension provider.


Do I need advice before I buy an annuity?

Until 2015, buying an annuity was the only way retirees could use their pension pots to fund their retirement. But due to new pension freedoms, over 55s have various options on how to take their money purchase pension savings.

So, buying an annuity is just one option available to you now to fund your retirement. To help you understand the alternatives, Money Advice Service explains your options for using your pension pot to fund retirement. You should make sure you are making the right decision for your circumstances and that you understand all your options and their implications.

Our friendly customer service team can help guide you through the annuity application process, but we cannot offer financial advice or tell you if an annuity is right for you.

You are entitled to free and impartial guidance from Pension Wise, the UK government’s Money and Pensions Service. If you are aged 50 or over, you can receive tailored guidance online, over the phone or face-to-face to help you understand your retirement options.

moneyandpensionsservice.org.uk
0800 138 3944

If you need further assistance, you may wish to get in touch with an independent financial advisor. You can find a local financial advisor on the Money and Pensions Service site.