Annuities explained Enhanced annuities
At least one in three of us could be eligible for a higher income when we retire. All you have to do is buy a type of annuity that pays out a higher income if you're in a poor state of health. The trouble is that most of us don't realise it.
An enhanced annuity works on the basis that you will have a shorter life-span than someone in a better state of health – essentially using up your pension fund more quickly by giving you access to more money each year.
How enhanced annuities work
Your age and lifestyle will affect your annuity rate
If you are in poor health, the secret to unlocking extra cash is to buy an enhanced or impaired-life annuity, which not all providers offer.
Impaired-life annuities
An impaired-life annuity pays out more to people with particular health problems (anything from a triple heart bypass to high blood pressure) and is based on the individual's circumstances. Most providers look at your personal situation in detail. For example, two people who have both had a heart attack could still receive different levels of enhancement, depending on the type of attack and when it occurred.
Enhanced annuities
An enhanced annuity is less tailored than an impaired-life annuity and pays a higher annuity rate to those with particular lifestyles, including smokers and the obese. Providers take the view that, as you're unlikely to live to a ripe old age, they can afford to pay you more while you're still around.
Even if you're not eligible for an enhanced annuity, or you're unsure whether you're eligible, it's still worth checking to see if you can get a better deal than the one you're being offered by your pension scheme or provider.
Enhanced annuities - seeking advice
If you're thinking about an enhanced annuity, it's essential to get independent financial advice. Even if you've never taken financial advice before and you never take it again, take it before you retire. Decisions you make then determine the income you receive for the rest of your life – and you can't correct bad decisions later on.
You'll need to contact your pension provider if you don't receive a letter in the lead up to your retirement
See the section on buying an annuity for tips on getting financial advice, and use the checklist below to make sure you get the best enhanced annuity for you.
- If your adviser doesn't ask about your health and lifestyle to see whether you're eligible for an enhanced annuity, walk out. He or she is not a specialist.
- There isn't a single 'best' provider for everyone, so insist that your adviser contacts every enhanced annuity provider in the market.
- Be honest. Tell your adviser about your health and lifestyle – hold back, and you could lose out.
- If your partner smokes or is in poor health, you could still get an enhanced joint income – even if you're a fitness fanatic.
- You have to complete only one application form, which your adviser will send to all providers. It's unlikely that you'll have to take a medical but you may need a doctor's report.
- After your IFA has shopped around for enhanced annuities, compare the best quote with the one your pension provider has given you. Then simply pick the one which offers most. Additionally, the Financial Services Authority (FSA) provides comparative tables that will help you to shop around.
- For a personalised solution, call our experts on the Which? Money Helpline
- Take a look at our expert guide to writing a will
- To help find the right financial adviser, read our helpful guide
