Karen Theobald: Shop around to find the best annuity deal for your retirement

Thousands of people passed up on the chance to secure extra pension income totalling almost £96 million last year because they didn’t buy an enhanced or life impaired annuity.

Scots are retiring and settling for inferior incomes from their pension savings because they’re not made aware that they qualify them for higher payouts.

If you’re nearing retirement and want to make sure you don’t let such significant sums of money going begging, take time to look into an enhanced or life impaired annuity and secure the best possible retirement income available.

An annuity is a financial product that lets you convert the lump capital sum in your pension pot into an annual income for life.

As life expectancy has increased, people are receiving the annual income from their annuity for longer and this means they have become more expensive to buy.

To secure the biggest retirement income possible from the money in your pension, it has, therefore, become more important than ever to search out the best annuity rate.

If you have a lifestyle or medical condition that might reduce your life expectancy, annuity providers will offer you a better rate than people with no such issues who might reasonably be expected to live for longer. These annuities are called enhanced or impaired life annuities.

An enhanced annuity pays a higher rate to people with a particular lifestyle and they are commonly available for those who smoke or are overweight, for example.

The health implications of smoking or being overweight are likely to shorten your life expectancy and as such providers are willing to pay a slightly higher annual income on their annuity. An impaired life annuity works on the same principle and pays out more to people who have a specific medical problem or condition, on the basis they are unlikely to live as long as their healthier contemporaries.

If you have had a stroke or a heart attack, for example, it is possible to buy an impaired annuity and secure a bigger annual income than would be available from a normal annuity.

So who qualifies for one of these annuities? A lot of people, is the broad answer, but many aren’t aware of it.

When it comes to enhanced or impaired life annuities, anyone with a qualifying medical condition or lifestyle can benefit from the more generous rates.

However, it is incredibly important to make sure that you explore the whole market, as not every annuity provider will offer enhanced or impaired life annuities. Some will simply offer their standard rate, which does not make allowances for your own particular condition.

And you do not have to be on death’s door to qualify for an enhanced or impaired life annuity. There is a popularly held misconception that only those who have the most serious medical conditions or who are in extremely poor health are eligible. This is not the case at all, and so even if you think you are in rude health, it is worth exploring whether you may qualify for an enhanced or impaired life annuity.

Perhaps you enjoy the occasional cigarette, but would not class yourself as a smoker. Similarly, you may enjoy a drink and without going over the top, still consume more than the recommended weekly amount.

There are many people who have taken prescribed medication for years and feel it is simply a part of everyday life, or who have higher than normal blood pressure or cholesterol.

In all of these cases it is very possible that those who may fit the criteria do not see themselves as seriously ill or eligible for an enhanced or impaired life annuity. However, the reality is that all of them would be likely to find better rates than the standard annuity market could offer.

Unfortunately, many people therefore miss out and by significant amounts. Market research shows that the difference between standard and enhanced annuity rates is almost 20 per cent. One provider found that when people do not take the time to shop around only 1 per cent end up with an enhanced annuity. This is in contrast to the 45 per cent who buy an enhanced annuity after shopping around and exploring their options. In all, just one in five people buying an annuity takes an enhanced or impaired life product, yet research suggests that up to 60 per cent could qualify. This means that 40 per cent of people buying annuities are signing up to a product that pays less than they are eligible for – and once you’ve bought a conventional annuity you cannot switch to a better rate if you later find one.

The average pension pot is in the region of £30,000. Based on standard annuity rates this would buy an annual retirement income of around £1,500. Therefore, those who could benefit from an enhanced rate – which is typically a fifth higher - are missing out on £300 a year. During 2012, 800,000 people retired and with 40 per cent not buying enhanced or impaired life annuities, a massive £96m of additional annual income is going begging.

The amount that each individual misses out on will vary considerably, depending on their age, their medical history and the size of their pension pot.

However, what is certain is that hundreds of thousands of people are collectively losing out on millions of pounds because they do not explore the option of an enhanced or impaired life annuity.

Enhanced annuity sales broke the £1 billion barrier for the first time during the second quarter of 2012 and they now make up a significant slice of the market.

However, there are still many more people who could benefit and if you are thinking about an annuity, then you should be looking into whether an enhanced or impaired life annuity might be attainable.

You will not lose anything by enquiring and for once, giving an insurer the warts and all run down on your health could be financially beneficial.

• Karen Theobald is principal market leader in Edinburgh at Buck Consultants