'I almost missed out on 10% extra by taking the wrong annuity': Why it's vital to pick pension income carefully

By Joanna Robinson

Published: 07:31 EST, 9 August 2012 | Updated: 11:54 EST, 9 August 2012

Michael Duncum got 10 per cent more retirement income after a financial adviser told him he would qualify for an enhanced annuity

Michael Duncum got 10 per cent more retirement income after a financial adviser told him he would qualify for an enhanced annuity

Years of careful saving for your retirement can be ruined if you plump for the wrong type of annuity.

The importance of picking wisely and exploring your options was highlighted to Michael Duncum, of Norfolk, who retired two years ago and bagged ten per cent more annuity income thanks to a medical condition that he never thought would count for an enhanced annuity.

Choosing a decision that will affect your retirement income for the rest of your life, so it is not to be taken lightly.

One of the most important things to remember is that you are under no obligation to take the annuity offered by your pension provider.

In fact, in most cases you can get a far better offer by shopping around with other providers – known as your open market option. 

However, it is easy to see why so many are bewildered by the choice of annuities on offer and find it increasingly difficult to make an informed choice. 

Annuity rates have plummeted as a result of the economic downturn and the eurozone debt crisis meaning more and more pensioners are desperately seeking products which offer the most money possible. 

Lifetime annuities 

These are the option for those in good health and deliver a guaranteed income for life, either at a fixed or increasing rate. They are the simplest form of annuity and can be individual or joint.

This is another very important consideration. While joint annuities will pay out a little less, your partner will continue to receive money in the event of your death – essential if they don’t have a pension or significant savings of their own. 

 

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Enhanced annuities

Enhanced annuity gives me 10 per cent more

Michael Duncum from Norfolk retired two years ago aged 67, and after speaking to a financial adviser was able to get an enhanced annuity through Just Retirement. 

He suffers from bipolar disorder, but said he hadn’t realised it would make any difference to his annuity rate. ‘I did wonder. I hadn’t thought that my condition would yield any advantages and it wasn’t until I was told by my financial adviser that I found out differently.’

He says that the enhancement got him about 10 per cent more income than a standard annuity would have paid out.

The annuity pays Mr Duncum £319 a month after tax, and with other savings and a separate pension pot he says; ‘it makes the difference between really struggling and being just about comfortable’. He said everyone’s golden rule should be ‘to have a truly independent financial adviser’.

Many people don’t realise that an ongoing health condition can entitle them to a considerably higher annuity rate – based on the assumption that they will not live as long as a healthy pensioner. 

Those with serious medical conditions which affect life expectancy like heart disease, diabetes and certain types of cancer should consider impaired life annuities which will pay significantly more.

Those with less serious but potentially life-threatening lifestyle habits like smoking, obesity or having spent a large proportion of their working life in hazardous environments, should consider enhanced annuities.

‘Health can have just as big an impact on the returns an individual retiree can get from an annuity as any other factor’ said Stephen Lowe, group director of external affairs and customer insight at Just Retirement.

‘Financial advisers are well placed to explain these issues and to make sure each retiree chooses the best options that suits their own circumstances.’

Fixed-term annuities

Unlike conventional lifetime annuities which deliver a guaranteed income for life, fixed-term annuities pay the income for an agreed term, then at maturity return a guaranteed lump sum that can be used to buy another retirement income plan.

They allow retirees to take an income but avoid locking in to today’s lifetime annuity returns. 

Understandably in the current climate, this type of annuity is growing in popularity as pensioners hope that annuity rates might improve in the coming years. 

Just Retirement has pioneered an option allowing those diagnosed with health issues to exit during the term to switch to an enhanced annuity.

Stephen Lowe said: ‘A 65-year-old who does not qualify for an enhanced annuity has a 30 per cent chance of health deterioration within 10 years and a 40 per cent chance in 15 years.

'Often the best enhanced rate is available close to the point of diagnosis rather than when treatment is underway, which underlines the importance of the conversion feature.’

A word of warning

If your existing pension scheme offers a guaranteed level of income or generous yearly increases think very carefully about switching to another provider.

Both these factors will probably have been promised some time ago when the economy was in much better shape, which means current annuity rates are very unlikely to be able to match them.