The only downside with enhanced annuities is people need to disclose full details of medical and lifestyle conditions, according to Andrew Tully, pensions technical director of MGM Advantage.
“This means more information needs to be given to the annuity provider so it may take a little longer than a conventional annuity, but the higher income available as a result can be substantial.”
Typical enhancements range from around 5 per cent for mild lifestyle affecting conditions to 40 per cent or more for serious medical impairments, according to Mark Stopard, head of product development at Partnership.
An enhanced annuity will not be subject to fluctuations in investment conditions nor do clients need to have regular medical checks or worry that if their health improves they will get less income, Mr Stopard clarifies.
But like all annuities, while the income is guaranteed for life, Mr Stopard notes it may not keep pace with the increased cost of living, especially if a level annuity is selected. It is also not possible to vary the income payments once the annuity has been set up.
If a person is ill and has a very short potential lifespan, Mr Stopard suggests it may be a better idea for them to use their pension pot in some other way to maximise the death benefits, such as income drawdown, phased retirement and phased drawdown.
However, Mr Stopard said it is important to understand these options and the consequences of them before deciding on the best option.
Stephen Lowe, group external affairs and customer insight director of Just Retirement, agrees the main drawback of all lifetime annuities is that they are not flexible.
Apart from a short ‘cooling off’ period, Mr Lowe warned there is no going back once the decision to purchase an annuity has been made which makes it important to choose the right plan and options at the outset.
But from a practical perspective, Mr Lowe says it is relatively easy and inexpensive to shop around for annuities including enhanced options and, once bought, the annuity provider will usually deal with administration such as paying income tax to HM Revenue & Customs.
“All annuity buyers should check to see if they qualify for an enhanced annuity because of the extra pounds it will put in their pockets.
“It is important to remember that at times of low interest rates as we have now and modest investment return expectations, variations in life expectancy assumptions have a proportionately bigger effect on the overall annuity income available.”
