A dose of healthy honesty could boost your retirement income

Any reduction in life expectancy can lift pension pay-outs, writes Jeff Salway

SCOTS aren’t always comfortable with being open about their health conditions, whether it’s a smoking habit, problems with blood pressure or even something life-threatening. But when it comes to your pension, being honest with your provider can make a huge difference to your financial comfort in retirement.

The vast majority of people buy an annuity at the end of their working lives to convert their pension fund into a regular income for their retirement. Yet many are unaware that they could add thousands to their retirement income by coming clean about any health issues they may have – counter-intuitive if you’ve never admitted to your doctor how many cigarettes you really smoke or let on about those worrying palpitations or headaches.

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If your pension company thinks you won’t live as long as its typical customer, it could offer a higher income rate in the form of an enhanced annuity, as it doesn’t believe it will have to pay out for so long. Enhanced annuities pay out up to a fifth more than conventional annuities to those who the pension company judges likely to have a shorter than average life expectancy.

It’s estimated that more than four in ten retirees could fall into that bracket – the proportion will be far higher in low income areas of Scotland – and get a higher regular income for the duration of their retirement, but it’s an opportunity that all too often goes begging.

Andrew Tully, technical manager at MGM Advantage, said the average person taking an enhanced annuity with the firm gets 23 per cent more income each year in their retirement than they would otherwise have received.

A man retiring at 65 with the average impairment and with a pension fund of £100,000 would boost his retirement income by 26.4 per cent if he takes an enhanced annuity – equating to an extra £8,279 over the first five years of his retirement.

“This shows how important it is for people to investigate an enhanced annuity if they have medical or lifestyle conditions,” said Tully. “It is a sizeable amount of extra income, given that many people – even those who get an enhanced annuity – can live for 25 years in retirement.”

All the evidence suggests that most people who qualify for an enhanced annuity are either not aware of them or don’t think they are eligible. The problem is partly that many people still buy their annuity through their existing pension company without taking time to look for a better value alternative.

Through the “open market option” retirees have the right to search across the whole market for the most suitable deal for them.

While several pension providers offer competitive annuities, many that do not have been accused of failing to make it clear to customers that they don’t automatically have to accept their offer.

The situation is improving and there are moves afoot to make insurers highlight the open market option more effectively in the retirement packs they send out, but the industry remains reluctant to make shopping around the automatic option.

Failure to shop around can prove a particularly expensive mistake for those who qualify for enhanced annuities. Association of British Insurers figures show that while more than four in ten people who buy an annuity on the open market get an enhanced rate, just 1 per cent of the retirees who stick with their existing pension firm get the extra income offered by an enhanced annuity.

And research suggests that up to 60 per cent of people can qualify for some form of enhanced annuity, said Tully. “This can be down to a whole host of reasons – where you live, if you smoke, take medication or have health conditions,” he said. “These don’t need to be immediately life-threatening conditions, as they include diabetes, high blood pressure or being overweight.

“This is one time in life that it pays to be honest and admit your health may not be perfect. By doing so you may get 20 per cent or more in retirement.”

More than 1,500 medical conditions come into play when it comes to qualifying for an enhanced annuity. Among the most common are stroke, cancer, Alzheimer’s disease, arthritis, asthma, high blood pressure, high cholesterol, diabetes, heart disease, leukemia, liver or kidney complaints, organ transplants, Parkinson’s and rheumatism.

If you have or have previously suffered from such conditions, let your pension provider know when you take out your annuity. That also applies if you smoke regularly, have been in hospital for medical treatment or are on – or have previously taken – prescription medication.

If one or more of those applies, you could be eligible for one of the different forms of enhanced annuity.

They include lifestyle annuities, where the focus is on environmental or personal behaviour issues that may result in lower life expectancy. These pay out more to regular smokers (usually those who have smoked at least ten a day for the past ten years), people with obesity, high cholesterol, high blood pressure or diabetes.

Enhanced or impaired annuities pay out more to those with health problems that could lead to life expectancy being significantly compromised. This covers medical conditions including heart attacks, cancers, organ diseases and life-threatening illnesses such as strokes and multiple sclerosis.

The extent to which these conditions improve the pension income you get in retirement can vary significantly.

MGM’s comparison of the income paid to a 65-year-old man with a £100,000 pension pot shows that smokers alone can get £1,000 a year more from an enhanced annuity (at £7,151 a year) than someone taking a conventional annuity.

Further up the scale, if you have diabetes and high cholesterol, an enhanced annuity would pay £7,922 a year, compared with the conventional annuity payout of £6,266.

At the most serious end, a retiree with lung cancer that has spread to the bones and who is receiving radiotherapy and chemotherapy can claim an annual retirement income of £15,818 a year – a very useful addition of nearly £10,000 a year over the amount they would get if they failed to apply for an enhanced annuity.