Annuity Guide

Impaired or Enhanced Annuities

These annuities are specifically designed for people with serious medical impairments whose life expectancy is likely to be significantly reduced. People eligible for impaired annuity rates usually have suffered or are suffering from ill health conditions such as cancer or cardiovascular impairments. Lifestyle can also enhance annuity rates such as smoking, being overweight or having a stressful or dangerous occupation.

According to research conducted in December 2010, the difference between an average standard annuity and an average enhanced annuity is 22.83%. Over the average retirement, this amounts to £11,682.74 for men and a massive £13,148.40 for women on a pension pot of £50,000

Compulsory Purchase Annuity (Pension Annuity)

This type of annuity is usually bought with funds from a personal pension plan or scheme pension. Impaired and Enhanced Annuities are classed as a Compulsory Purchase Annuities.

When you approach your retirement age, your pension provider will write to you offering their own annuity usually with various options. As this will be the most important financial decision you are likely to make its important to shop around using the open market option to find a provider who will offer the best annuity rates possible, particularly if you have any medical conditions.

You will have the option to take up to 25% tax free cash or Pension Commencement Lump Sum from your Pension Annuity and then the remaining fund will be used to purchase your annuity.

Purchase Life Annuity

This type of annuity is usually bought from funds other than from personal pension plans such as savings or most often from the tax free cash lump sum available from a pension plan. People who benefit from this type of annuity will most likely want to top up their retirement income with a fixed lifetime income. This annuity may be useful for someone who has received an inheritance for example.

Although the annuity rates for Purchased Life Annuities are not as favourable as a Compulsory Purchased Annuity, the tax situation is more attractive. This is because the income from a Purchased Life Annuity is partly classed as a return of capital and can therefore provide a higher income net of tax than a Compulsory Purchase Annuity.

Immediate Needs Annuity

This is arranged to provide an income to cover residential care home fees for the annuitants lifetime. It is usually set up when the annuitant is already in residential/nursing care or is about to be admitted to a care home.

The rules of HMRC state that the income has to be equal or less than the actual care home fees. A surplus can not be paid to the estate or the annuitant even if the fees are reduced. An Immediate Needs Annuity is purchased using a single lump sum in exchange for a lifetime guaranteed income.

With Profits Annuity

As the name suggests the annuity is invested in the life company’s With Profits Fund and provides a potential for future growth unlike with a conventional annuity. If the annuitant does not need to rely solely on the income from their annuity and they are comfortable with taking a higher risk with their annuity then a With Profits Annuity may be right for them.

The income from a With Profits Annuity is variable and is dependant on the Anticipated Bonus Rate. The anticipated bonus rate is decided by the annuitant and is usually between 0% and 5%. At the policy anniversary the annuity company declares the actual bonus rate and if it is higher than the ABR then the income will either increase or will remain the same. If the bonus rate is lower than the ABR then the annuity income is likely to decrease. There is usually a minimum or guaranteed income level however this can be much lower than standard annuity rates offered via a conventional annuity.

Conventional (Traditional) Annuity

This is the most popular type of annuity as the income is guaranteed for the life of the annuitant. Enhanced and Impaired life annuities are usually conventional annuities and this means that the income will remain fixed at outset.

Third Way Annuity (Short Term Annuity)

These are relatively new to the annuity market place. The disadvantage of a conventional annuity is that once the annuity has started then it can not be altered even if the annuitant’s circumstances change i.e. if they remarry or divorce. A short term annuity has a fixed term, usually for 3 or 5 years or up to age 75. After the fixed term, the annuitant can choose to purchase another short term annuity or a lifetime/conventional annuity. Buying a short term annuity is a way of deferring certain decisions when purchasing a lifetime annuity such as whether to include joint or single life.

Open Market Option

An Open Market Option gives you the right to shop around on the open market for a better annuity rate than would have otherwise been offered by your existing pension provider.

When you purchase an annuity via the Open Market Option, your existing pension provider will pay you the tax free cash lump sum if chosen.

Enhanced/Impaired Annuities in Action

If you qualify for an enhanced or impaired life annuity you could receive up to 40% extra income and some cases, depending on the severity of your medical condition it could be even higher compared to a standard annuity, so it’s really worth getting a quote from us.

To give you an example of the difference in pension annuity income between a standard annuity rate and an impaired/enhanced annuity we have provided the case study below.

Impaired versus Standard

The example below compares the highest impaired life income for a male aged 65 and a female aged 65 with two of the most common medical impairments against standard rates for a male and a female aged 65 with no medical impairments.

Male aged 65 Female aged 65
Stroke (impaired) £7,453 £7,116
Bowel Cancer (Impaired) £7,432 £7,251
No Medical Impairments £6,773 £6,451

Enhanced versus Standard

The second example below compares the highest enhanced annuity income for a male aged 65 and a female aged 65 who smoke with the highest standard annuity rates for a male and female aged 65 who are non smokers.

Male aged 65 Female aged 65
Smoker (enhanced) £7,595 £7,377
Non Smoker (standard rates) £6,773 £6,451

Both examples assume a purchase fund of £100,000 after tax free cash and the annuity basis as single life, Level, Monthly in arrears, with a 10 year guarantee.

These examples should be taken as a guide only and the degree of enhancement is dependent on the severity of the health condition and medication prescribed. All applications are fully underwritten on an individual basis therefore the above examples may not represent the actual enhancement.

What Annuity Options Can I Choose From?

There are many different options available on all the annuity types mentioned above. Each option will influence the annuity income you will receive so it’s important to understand each option to ascertain whether or not it will be valuable to you.

Joint Life or Single Life?

The difference in income between a joint life and single life annuity can be quite considerable. A joint life annuity generates a lower annuity income because of mortality factors and that the income is going to be paid out for longer with a joint life annuity. A joint life annuity is suitable for a spouse or dependent who will suffer financially if the annuitant were to die.

The annuitant can chose what percentage of income they like would continue to the spouse or dependent upon their death which can influence the level of initial income. The most common options are 100% and 50% spouses benefit. For example, if the spouse or dependent requires 100% of the annuitant’s income to continue after their death then the starting income will be lower than choosing 50%.

Guaranteed Periods

A guarantee period, guarantees that the income will be paid to the spouse or dependent for a specific time on the death of the annuitant. The guarantee begins on the start date of the annuity policy and not on the death of the annuitant. The typical guarantee periods are 5 and 10 years.

Capital Protection (Value Protection)

This option is suitable for someone who wants to leave a lump sum as apposed to a continuing income to their spouse or dependants. This option is only available up until the annuitants 75th birthday. The lump sum benefit is paid less withdrawals and a tax charge of 35%, although this may increase to 55%.

Inflation Proofing

Also known as the “indexation” option, this option provides a protection against inflation either by selecting a fixed percentage such as 3% or 5% or by the Retail Prices Index. With this option the annuity would increase on each anniversary policy.

The starting income on an annuity with Inflation Proofing is usually much lower than an annuity with no inflation proofing (level).

Income Frequency

Again the level of annuity income can vary depending on how the income is to be paid. For example if you request the annuity income to be paid annually in arrears, the initial income is likely to be higher than choosing monthly in advance.

The most common options are annually and monthly and either in advance or in arrears and this depends on how quickly you require the income.

With Proportion

If the annuity income has been paid annually in arrears for example, then this option allows the surviving spouse or dependent to receive a proportion of the next income payment to be paid immediately. This option is a relatively low cost option.

With Overlap

This option is applicable to joint life annuities where a spouse’s pension (50%) has been chosen together with a guaranteed period.

When early death occurs usually the spouse or dependent would continue to receive the annuitant’s income until the end of the guaranteed income and after the guaranteed income the spouse would receive the spouse’s pension .i.e. 50% of the annuitant’s income. With Overlap, the spouse or dependent’s pension is paid immediately in addition to the annuitant’s pension until the end of the guaranteed period.