When smoking looks likes the healthy option

Many retirees are missing out on thousands of pounds in pension income by not buying an annuity that pays significantly better rates to those with common health problems.

Financial advisers say smokers, the overweight and diabetics could boost their income for life by buying an “impaired” or “enhanced” annuity.

“The increased rates on these products apply because of shorter life expectancies for those with certain conditions,” says Steve Hunt of Rockingham Retirement, a retirement income specialist. “Generally, the more serious the condition, the more money the applicant will get.”

Hunt says a lifelong smoker with Type 2 diabetes could increase his £3,162-a-year pension to £3,715-a-year, based on a £50,000 pension fund, by buying an enhanced/impaired annuity. “That’s an increase of more than 17 per cent on the conventional annuity rate,” he points out.

“Those suffering from non-insulin dependent diabetes and occasional angina – two very common conditions suffered by those in their mid-60s – could boost pension income by more than £2,000 a year with an impaired life product,” adds Hunt.

Other conditions that qualify for an impaired annuity include cancer, chronic asthma, heart attacks, high blood pressure, kidney failure, multiple sclerosis and stroke.

In spite of the clear financial benefits of purchasing an enhanced or impaired annuity, the take-up of these products is surprisingly low.

Last year, about 7 per cent of annuity sales were for enhanced or impaired products. However, it has been estimated that one in four retirees could qualify.

Take-up may be so low, say advisers, because public awareness of the products is poor. Pension companies are not obliged to tell customers about enhanced annuities. “Those rolling over [buying an annuity] with their existing provider may not be asked about their health at all, nor given an indication that an enhancement may be available if they are in poor health,” says Nigel Barlow of Just Retirement, the specialist retirement income advisers.

“In face-to-face interviews we conducted earlier this year, it came as a surprise to many to discover that they can obtain an increased income if they declare their medical condition.”

Most major insurers will offer enhanced or impaired annuities but the products are not widely available across the market and rates differ from provider to provider. “Those shopping around may find it difficult to obtain enhanced rates but should clearly inform the provider of their conditions and ask if any enhancement is possible,” says Barlow.

“Those who approach an adviser to discuss annuity options will be asked to complete a medical questionnaire before a rate is obtained,” he adds.

It is important to declare all medical conditions when applying for an enhanced product as this could improve income even further.

“A lot of annuitants still feel uncomfortable about revealing lifestyle or medical conditions to a financial adviser,” says provider LV. It estimates that 150,000 people could have qualified last year for an enhanced annuity, but purchased a standard annuity instead.