Enhance your retirement income - with honesty

“Annuity rates are at their lowest levels ever”, “the annuity trap”, “pension income on track for biggest fall in a decade”. The news doesn’t make for happy reading for those who are approaching retirement. After you’ve navigated the myriad of complex options and features on an annuity (which I’ve talked about previously) it seems that you’ll end up with a paltry income after all. That’s if you believe the headlines.

However, there is a way to boost your income, in some cases, by up to 50% if you’re aware of it and you qualify. Insurers refer to them as Enhanced or Impaired Life Annuities. Insurers try to judge the life expectancy of every customer so as to give the best rates and ensure that they don’t end up paying out more than they take in.

It sounds rather morbid, but any illnesses or health conditions that you suffer from could boost the income an insurer is willing to offer you as they perceive you as a lower risk to their profit margins (in other words they don’t expect you to live as long!) Some measures indicate that there are more than 1,500 medical conditions¹ that could boost your income: from high cholesterol and blood pressure through to strokes and heart attacks that you may have suffered.

An odd state of affairs with human psychology sees us being very honest about our health when purchasing insurance products - you don’t want to give them a reason not to pay out. However, when buying an annuity people tend to downplay their health issues. Yet this is exactly what you should not be doing.

Such things as whether your partner smokes, you take regular medication or even if you snore too loudly can result in an increase in your income. The Telegraph reported earlier this year that sleep apnoea (which results in loud snoring) can add up to £800 a year on to your retirement income!

So the most important thing to remember when purchasing an annuity it to be honest about your health – it could add thousands of pounds to your annual income in retirement.

There is a wealth of information about pensions and investments; speak to an independent fincancial adviser who can help you navigate the options and make the best choices for you.

 

1 Medical conditions covered by Just Retirement as at October 2012.

 

Inflation - a real blow to pension income. What to do?

When selecting a pension income there are numerous possibilities: full/phased capped/flexible income drawdown; level/rising guaranteed (or not) annuities and many options in between, all of which are offered by dozens of different providers. To say it’s potentially confusing could be an understatement. Sound, independent financial advice can help ensure that you get the most appropriate retirement income for your needs with the least amount of stress. For example, did you know that shopping around for your annuity could add 20% to your income compared to accepting your existing provider’s annuity¹?

But shopping around isn’t the only important consideration; you also need to consider your current and potential circumstances - and what is important to you. In this respect the effect of inflation is an important concept which can often be hard to fully grasp. For example, during the 1970s inflation averaged 13% p/a which would reduce an annual pension of £10,000 to the equivalent of just £2,500 after ten years!
Obviously, by today’s standards we’d consider this to be ‘high’ inflation (the Bank of England’s target is 2%) but recent figures showed a shock rise, the biggest for over a year, to 2.7%. Inflation of just 4% per annum would reduce the purchasing power of a 65 year old’s pension by nearly a half by the time they reached 75.

What’s more, the government’s measures of inflation are of little relevance to pensioners who tend to experience a considerably higher level due to proportionally higher spending on commodities such as food and fuel. Last year Saga calculated that real inflation for 55-64 year olds and the way they live was in fact 6.6%.

The good news is that you can buy an annuity that grows in value in line with inflation so as to maintain your purchasing power. However, these policies typically mean that you need to accept a lower initial income – often more than a third less² and it can take many years to recoup the difference. You need to consider what factors you deem to be the most important in relation to your future retirement. Choosing your retirement income is a completely personal and individual choice and it can be challenging to know where to start . Speak to a financial adviser if you feel you need guidance to make sure you ask yourself the right questions and, ultimately, make the right choice.

1 According to Money Advice Service (government advice service)

2 Based on Hargreaves Lansdown’s “best buy” rates for 65 y/o male (checked 13/11/2012)