Enhanced annuities work in the same way as conventional annuities but are designed to offer a higher income for those with certain medical conditions, a poor health history or lifestyle.
As with their conventional cousins, the client buys the enhanced annuity with some or all of their pension pot to replace the salary they earned before retirement. Unlike some of the so-called ‘third way’ annuities, there are no ongoing charges or investment decisions for the client to make.
According to Andrew Tully, pensions technical director of MGM Advantage, the income can be substantially more than would be paid from a conventional annuity - around 23 per cent more on average.
Stephen Lowe, group external affairs and customer insight director of Just Retirement, says it is more important than ever for retirees to maximise their pension income given the low rates on offer due to increasing longevity and low gilt yields.
Enhanced annuities can pay between 10 and 20 per cent more income than a standard annuity for relatively common ailments, he states. and up to 50 per cent more for more serious conditions.
“Enhanced annuities – now often referred to as individually underwritten annuities – offer a higher level of income than standard because they take into account additional factors other than age that may impact on life expectancy.
“This may include lifestyle factors including smoking and alcohol intake and the health of individuals, including their medical history and any medicine they are prescribed.
“A broad range of health and lifestyle conditions could qualify... ranging from smoking, high cholesterol and obesity to more serious conditions such as cancers and heart disease.”
Mr Lowe notes sales of enhanced annuities have risen more than four-fold in five years to close to £4.5bn in 2012.
Mark Stopard, head of product development of Partnership, says differentiations are generally made between impaired annuities, where a person has a medical condition which will reduce their life expectancy, and enhanced/lifestyle annuities, which relate to health conditions brought on by lifestyle choices such as obesity, high blood pressure and heavy drinking.
While enhanced annuities are generally pension annuities, that is to say they are purchased with a pension fund, Mr Stopard adds they can also be purchased life annuities bought using other funds.
Mr Lowe states income is normally paid net of tax into the retiree’s bank account at the agreed intervals. The provider administers the payments and uses the client’s tax code to determine the correct amount of tax to pay.
Partnership’s Mr Stopard says annuities typically pay either monthly, quarterly, half-yearly or annually as selected by the client at the start of policy.
Pension annuities are taxed at source as earned income and do not require clients to complete tax returns. Conversely, a proportion of the income from purchased life annuities is not subject to tax and Mr Stopard states this can be very tax efficient in certain circumstances.
