Yet many miss out on this valuable money because they do not realise they will get paid more if their life expectancy is lower as a result. Now pension experts are urging pensioners to reveal all their health and lifestyle issues when buying an annuity, to generate extra income throughout their retirement.
An annuity is the guaranteed income for life that people can buy with their pension pot when they retire.
Annuity providers give customers with a lower life expectancy MORE money, because they do not expect to pay out as long. These products are called “enhanced” or “impaired life” annuities.
Buying an annuity is a rare moment when people actually benefit financially from being in poor health. With other products such as life insurance, they pay more because they are more likely to claim.
Pensioners can claim higher annuity rates if they have suffered from a serious illness, are overweight, or have unhealthy habits such as smoking and drinking too much alcohol.
Stephen Lowe, a director at specialist retirement advisers Just Group, said how much income you get from an annuity will depend on a range of factors such as your age, lifestyle and health history.
Many people understand that smokers can get higher annuity rates to reflect their lower life expectancy, but don’t realise that the overweight may also get more, as can those with even minor health conditions.
Those with multiple health problems and can claim even more, Lowe said. “If someone is obese, for example, they may also be receiving treatment for high blood pressure and high cholesterol.”
“This also applies to your partner or spouse, if you are taking out a joint-life annuity,” Lowe said.
Just Group’s analysis shows that about two-thirds of retirees buying a guaranteed annuity could get extra income due to health or lifestyle issues.
Yet just one in three of the 60,000 annuities bought in the 2020/21 financial year paid enhanced income, Lowe said.
“That suggests tens of thousands of people a year are missing out on extra income that could make a real difference as the cost of living spirals.”
The difference between the best medically underwritten rate and the worst plan on the market can be to more £1,000 a year, for life. “Over the course of your retirement, that could add up to tens of thousands of pounds,” he said.
A 65-year-old with £100,000 of pension could buy annuity income of around £4,952 a year with a poor value standard plan with no medical underwriting.
Someone who is obese, and also has high blood pressure and high cholesterol, could get as much as £5,642, Lowe calculates. That would give them an extra £690 a year.
If they lived for another 20 years, they would get an extra £14,000 in total extra retirement income.
A 65-year-old who smokes 20 cigarettes a day could increase their annuity income from £4,952 to £5,700, giving them an extra £748 a year, Lowe calculates.
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An asthma sufferer who uses a daily inhaler and has type 2 diabetes, high blood pressure and cholesterol could get £6,035 a year, which works out as a staggering £1,083 more.
If they lived for another 20 years after taking out that plan they will get an extra £21,660 in total annuity income.
The results vary greatly according to the condition, for example, someone diagnosed with bowel cancer in the last six months may only get £600 more, while somebody had a mini stroke four years ago and takes blood thinning medicine will get an extra £402.
This is still vital extra cash, though.
Lowe urged pensioners who want to buy an annuity to use a financial adviser or online broker service that can provide quotes from every provider, to ensure the best rate.
Then you must also answer all of the health and lifestyle questions open and honestly.
“If the annuity company doesn’t give you this option then ask why. Otherwise you may end up with an inferior deal,” Lowe said.