The value of enhanced annuity sales rose to £3.02 billion in 2011, an increase of 22% from £2.46 billion in 2010.
Enhanced annuities were introduced in 1995 and have grown in popularity to the point where they now account for over a tenth of the market. They are offered by annuity providers to those with medical conditions or lifestyle factors that reduce life expectancy. These can be extremely serious, in which case the rate offered can be 50% higher than a standard annuity, or milder impairments, where the uplift is less dramatic but is still a significant sum.
Enhanced annuity growth
Andy Sanders, senior consultant at pension specialist Towers Watson which produced the report, said: ‘2011 was another record year for enhanced annuity premiums, with many thousands of consumers benefiting from higher pension incomes because their medical condition or lifestyle has been assessed and a lower than average expectation of life anticipated.
‘Enhanced annuity sales were around 15% of the total annuities sold to consumers in 2011, yet the current range of medical conditions and lifestyle factors that can lead to enhancements suggests a greater proportion of retirees could benefit. Greater use of the open market option (Omo) at the point of annuitisation would undoubtedly drive this percentage higher.’
Open market annuity providers
Although many people could qualify for an enhanced annuity, not all annuity providers offer them. Specialist firms, such as Just Retirement, MGM Advantage and Partnership have done much to encourage ‘shopping around’ on the part of those about to retire, but the number of enhanced annuity providers has now grown to take in more mainstream providers such as Aviva, Canada Life and Prudential. The figures cited by Towers Watson are from nine firms, which also include Legal & General, LV= and Reliance Mutual.
The latest findings from the MGM Advantage Annuity Index, which tracks the income paid from annuities on a quarterly basis, shows that the average difference between standard and enhanced rates is nearly 20%.
Taking pension and annuity advice
The need for expert advice when searching the annuity market is emphasised by MGM Advantage’s pensions technical director, Andrew Tulley: ‘When people take advice and shop around, about 45% buy enhanced annuities. In comparison, a paltry 1% of those who don’t shop around end up with an enhanced annuity.This is a massive issue which cannot be ignored, as it shows too many people are getting a poor deal.’
Which? pensions expert, Ian Robinson says: ‘Shopping around for the best annuity rate is always worthwhile, but for anyone who may qualify for an enhancement it is absolutely crucial. A specialist IFA can help you get the best deal. Annuities are a one-off purchase, so it’s important not to settle for second best.’