Enhanced annuities
Enhanced and impaired annuities are one obvious way for clients to gain a higher income, dependent on their level of health. Such annuities pay a higher annual income to those with health conditions or lifestyles that will likely reduce their lifespan relative to a healthy peer. Examples of qualifying conditions include cancers and heart conditions, through to less severe ailments or lifestyle conditions such as high cholesterol or smoking.
Statistics show there is a stark difference in take-up of enhancements between advised and non-advised sales.
“In 2012, only 25 per cent of people purchasing conventional annuities took out an enhanced/impaired annuity but it is estimated that over 50 per cent of people are eligible for one,” says Mark Stopard, head of product development at Partnership.
“Indeed, 50 per cent of people who shopped around – by, for example, speaking to an adviser – took out this type of product compared to just 4 per cent of those who did not.
“This suggests that intermediaries play a vital role in educating people about the benefits of enhanced annuities. At first you might think it is tricky for an adviser to bring up this subject as no one wants to be reminded that their lifestyle or carefully managed medical condition may have an impact on their longevity.
“However, advisers tell us that when clients realise that this could mean a significant uplift in their retirement income, they are generally happy to share as much information as possible.”
Alternative annuities
A number of investment-linked annuities are available on the market. A with-profits structure benefits from ‘smoothing’, theoretically offering an income with lower levels of fluctuation. An investment-linked annuity works in a similar way but as there is no smoothing would offer the potential for both greater returns and greater drops in income depending on the performance of an underlying fund. This option is therefore only really suitable for those who are willing to take a greater level of investment risk.
Investment-linked annuities usually come with a guaranteed minimum income, although this is likely to be lower than the amount that would be secured by a conventional annuity to account for the potentially higher returns from the portion of the fund that remains invested.
A further option is an ‘open’ annuity, which allows clients to retain control over where their fund is invested.
“Those who opt for an open annuity benefit from a wide investment range, including regulated stock market investments such as shares and gilts,” says Adam Wrench, head of business and product development at London & Colonial.
“Unlike a lifetime annuity, an open annuity allows investors to take a higher amount of income – anywhere between 50 per cent and 120 per cent of an average of three annuity rates (which can be enhanced rates).
