A basic single-life enhanced annuity pays an income that only ceases on the retiree’s death.
For those with dependents, Stephen Lowe, group external affairs and customer insight director of Just Retirement, says an alternative is a joint-life annuity which will pay an income – usually two-thirds or a half of the starting income – to a surviving spouse or partner.
Enhanced annuities can also be bought with guaranteed periods that ensure the income is paid for a set period such as five years or 10 years, even if the annuity buyer dies sooner.
Mr Lowe says retirees can also choose to buy an index or inflation-linked annuity with an escalating income, which increases over time to help offset the effects of inflation.
While enhanced and impaired annuities can also be investment-linked or with profit products, Mark Stopard, head of product development of Partnership, states the majority are based on the standard or traditional annuity model but with additional income due to a person’s lifestyle or medical conditions.
According to Mr Stopard, these standard products include features such as:
Level income versus escalating income options
People who choose the level income option will find they receive more initially, according to Mr Stopard, but as their income does not increase with inflation or by a fixed percentage annually, they will see the value of their income erode over time.
Those who choose the escalating income option may start out with a lower income, but will see it increase over the years to combat inflation. Criticism of these products has focused on the fact that often the initial income level is set as such a level that the annuitant would need to live well beyond average life expectancy to achieve the same cumulative income as that from a level income annuity.
If someone chooses this option when they take out an annuity, Mr Stopard says the insurer guarantees to pay out for a minimum period – generally – between one and 10 years. If the annuitant dies before this period is up, Mr Stopard states their beneficiaries receive this income.
This feature allows the annuitant to protect up to 100 per cent of their initial investment for a given period of time. Should they die before the age of 75, Mr Stopard explains the amount of the investment, less gross income, will be paid to their next of kin, less a 55 per cent tax charge.
Joint versus single life
As with standard annuities, Mr Stopard said people can choose whether they want to have an income for their life or also provide an income for their spouse, partner or dependent for the rest of their lives.
Enhanced joint life annuities will take into account any health conditions or illnesses the second partner has and Mr Stopard says this can result in a higher income for both parties.