Boost your pension annuity income
A pensioner couple need £201 per week, excluding housing costs to live. The sharp jump in council tax and the costs associated with maintaining a property have hit the elderly particularly hard. It goes without saying, then, that shopping around for the best annuity is vital for maximising income in retirement. Still, one third of retirees accept the first annuity quotation that their existing pension company offers.
Scottish Widows Alison Morris says: “It is not always possible to switch to a new company, as insurers are looking for biggish pots. Most companies have a minimum pension (with) annuities of £5,000 or £10,000, and it can be even higher when it comes to an enhanced annuity, for health grounds.”
A level annuity pays out a set amount every year, and these rates have risen steadily over the past three years because bond yields, on which they are based, have been rising. However, level annuities leave pensioners vulnerable to inflation. If inflation runs at 3%, then after 25 years the purchasing power of a level income has fallen by more than half. One option is to buy an annuity that increases by a fixed amount each year. This will give you less to begin with, but will not slash your starting income to the same extent as one that is fully linked with inflation.
Fixed-increase annuities are also largely backed by level corporate bonds, even though the annuity providers are having to meet a rising liability. The point is: fixed-increase annuities have followed the level annuity rates upwards over the past three years, unlike index-linked contracts, which have fallen by 4%.
It is possible to improve your pension further by opting for an impaired health annuity which, unlike almost any other kind of insurance, rewards customers for poor health and bad behaviour by paying them bigger pensions. If a customer smokes, is overweight or suffers from high blood pressure or cholesterol, they could enjoy up to one-third more through an enhanced annuity. And if they have had more serious illnesses such as heart disease, cancer or multiple sclerosis, their income in retirement could more than double.
If people have a history of more serious and complex health problems such as heart disease, cancer, dementia, Parkinson’s or motor neurone disease, the company will ask for a doctor’s report. These customers are then underwritten individually.
Retirees are strongly advised to always get quotes from companies that would offer them an annuity. Bank of Scotland Annuity Service have departments specialising in this area.
Examples: (1) Take one client: because of a history of heart disease, Norwich Union offered £34,296. Tomorrow was next at £22,689, then Partnership Assurance quoted £20,410, Legal & General £22,744, Just Retirement £21,509, Scottish Widows £22,398 and Prudential £21,839.
(2) Recently a 63-year-old female client with high blood pressure who had a breast cancer episode in April 2004. She had a £30,000 pension pot, for which her own company had offered her £1,850 annuity. Scottish Widows was the best deal, offering £2,470 annual income, which was £620 a year more than the existing company.
(3) Sometimes the gap is even more eye-watering. Tomorrow offered a 74-year-old man with £56,000 savings – who had diabetes, had lost sight in one eye and had high cholesterol – nearly £1,500 more than the next best deals from Prudential and Just Retirement, boosting his pension by a quarter.
(4) Man from Glasgow: had various bits of pension gathered over a long career, but his two biggest pots came from long stints at an engineering firm and a marine leisure equipment provider. At retirement, his pension pots were not big enough to provide the kind of pension he had hoped for. He shopped around, and the best deal seemed to be with Norwich Union. But after NU gave him his original quote he heard about impaired life annuities and asked for another quote, taking his medical record into account.
He had always been very healthy and fit, and played competitive tennis for 50 years, but unfortunately things went a bit wrong in 1996 when he had a slight stroke and cancer of the bladder. After taking this into consideration, NU boosted its offer by nearly 7%.
It is absolutely crucial that people realise the importance of shopping around for the best annuity, and that they do have options. They should never accept the first offer they are made.