Little-known option could enhance your pension by hundreds a month

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WITH more final salary pension schemes closing, there is a growing demand for help with retirement options.

That guidance is needed, as thousands of pounds in extra income is being thrown away by individuals who aren't aware of one simple option.

Research conducted by specialist annuity provider Just Retirement found that 75 per cent of people approaching retirement are unaware of enhanced or impaired life annuities.

When reaching retirement, investors will become aware that annuity rates vary widely across the market. In some cases, the difference between the highest and lowest annuity rates can be more than 14 per cent for someone in good health. For those in poorer health the difference between the best standard annuity and an enhanced or impaired life annuity could be a further 23 per cent. Put another way, this could be more than 41 per cent above the lowest standard rate.

A 65-year-old receiving a standard annuity of 500 per month could be receiving an income of 705 per month if he has ailments that enable him to qualify for an enhanced annuity.

This would equate to 39,360 extra income if he were to survive for 16 years (the average life expectancy of a 65-year-old male according to the Government Actuary's Department).

Despite this, most people leave their pension money with the insurer with which they saved for their pension before retirement.

So as insurers continue to line their pockets with current annuity business, there are a whole host of new providers starting to capitalise on impaired and enhanced annuities.

Arguably, if you are a smoker, have high blood pressure, are overweight or have high cholesterol then the odds of getting a better annuity rate are significantly higher.

Becoming a 40-a-day smoker and living off take-away food may get you a higher annuity, but the chances are you will spend the extra you get and significantly more on funding your new lifestyle.

It is estimated that 40 per cent of people at retirement could qualify for some form of enhanced or impaired life annuity – based on the fact that 27 per cent of people in the UK smoke and 22 per cent are obese.

Add to this the number of people who have, or have had, some form of heart or lung disease or diabetes, and it is clear there is a substantial opportunity for many people to improve their income. Yet only about 10 per cent of people actually take out enhanced annuities.

However, with annuities in general seen as poor value for money with more benefits for the insurer than the pensioner, they are not the most favoured way to take your pension benefits.

Income drawdown plans are sweeping up the market. Originally designed for the wealthy with a retirement pot of well over 100,000, these arrangements can now be accessed by some of the poorest pensioners with as little as 20,000 in the pension fund. "Flexibility" and "control" are the two buzz words offered by these arrangements and sadly annuities cannot compete.

However, annuities are guaranteed, a rare quality in financial services these days.

Over the past five years most pensioners who were advised to go into drawdown will generally be happy with the performance of their fund. Double-digit equity returns have rewarded investors handsomely until the turn of the year, since when the majority have seen a total reverse.

However, as these arrangements are longer term, a period of sustained volatility could cause pensions to fall and a subsequent fall in pension incomes.

We only have to look at the current economic crisis and the equity markets at the turn of the century to see evidence of this.

If you worry about your pension fund then it may be time to buy an annuity – but make sure you check to see if you qualify for an impaired annuity.

• Jason Hemmings is director of Albannach Financial Management