by Bob Cook
Visitors to our Best Pension Annuity website ask us all kinds of interesting questions which we are happy to answer. Recently a customer who has already purchased an annuity asked if their annuity could be enhanced if they subsequently developed a medical condition. It is a natural question given that, as most of us age, we are more likely to suffer all kinds of medical conditions, some of which could have an impact on our life expectancy.
The very simple (and literal) answer to the question is No. However it is not our style to leave things at that and the subject does warrant more of a discussion.
The first thing to consider in this situation is the nature of an annuity and the benefits it offers customers. In our experience there are very few bad products, but rather products that are either used incorrectly or which in some way are not suitable for the particular customer. For example if this customer has a family history of heart disease, or was generally concerned about their health failing in later life, then perhaps an annuity was the wrong choice of product. By locking themselves into an annuity they have made themselves impotent to altering their retirement income later in life.
All financial products have various benefits and features; likewise they also carry differing degrees of risk. This is why it may be the case that your ideal product doesn’t exist. The benefit you like in one product, may not be offered in the final product you select. As a simple example, Annuities are guaranteed products where everything is agreed and set up at outset. Therefore they offer very little, if any, flexibility should your circumstances change later in life. This does not make them bad products . . . . . far from it.
A customer may like the absolute certainty that they will receive the income agreed at outset for life, no matter how long they live. In exchange for this they will have to forgo some features of other products or the ability to move to an alternative product that subsequently becomes more suitable for their needs.
It is for this very reason that annuity providers will not enhance an annuity, for whatever reason, once it has been taken out.
There are other alternatives available to customers that would allow them to take advantage of enhanced annuity rates should they develop a medical condition later in life. The team at best-pension-annuity.co.uk would be pleased to explain some of these options to customer.
While there are many benefits to annuities that should not be overlooked, there is a growing argument that customers should not lock themselves into annuity while they are still young or may not yet need an income. The world bank in March 2013 put the average life expectancy for people in the UK (male and Female) at 80.4 years. The earliest age most people can buy an annuity in the UK is at age 55. We have known people who are still working but nevertheless decide to take an income from their pension fund at this age. However if they decide to use an annuity to take that income they could cause themselves and their families more serious financial consequences in later life.
In the case above a customer aged 55 can expect to receive their income for 25 years. However if at say age 60 they were to suffer a series of major heart problems then this will undoubtedly shorten their life expectancy – at least in the eyes of an insurer. If they were not already locked into an annuity their heart condition would qualify them for an impaired annuity, which would likely result in a much higher income payment.
So what other alternatives are available to customers who feel that now is not the right time to lock themselves into an annuity but want the ability to take an income now, and have the opportunity of buying an annuity (standard or enhanced) later in life.
The first option to consider is income drawdown. This is in effect a hybrid of a pensions saving plan and a policy that provides retirement benefits such as a tax free lump sum and / or income. Unlike an annuity the customer’s pension fund is not given to an annuity provider in exchange for an income for life, rather the income is taken directly out of the customers fund, leaving the remainder of the fund under the control of the customer and still owned by them. Obviously taking money directly from the fund coupled with poor investment returns could deplete and possibly exhaust the fund, however it is hoped that overtime reasonable investment performance can maintain the underlying value of the fund and possibly grow it.
The main benefit with income drawdown in relation to this specific question is that they are very flexible products. If the customer suffered a serious medical condition they could instantly leave the income drawdown contract without penalty and purchase an impaired annuity.
Customers who like the flexibility of the drawdown option but who are concerned about the investment risk associated with Drawdown could consider a temporary annuity.
Although called an annuity the contract is based upon income drawdown rules, however like an annuity all benefits (particularly death benefits) must be set up and agreed at outset. With a temporary annuity at the start of the contract the customer has to decide on the following. Whether they want to take a tax free lump sum, if they want an income and the amount of income they want within the policy limits, what should happen to their fund / policy should they die and how long they want the temporary annuity to last, known as the term. Once these features are selected they cannot be altered.
At the end of the term the customer is paid a guaranteed maturity value, which was disclosed and agreed with them at outset. This guaranteed maturity value again cannot be altered and must be paid by the product provider to the customer even if there has been an investment crash.
While short terms (3 – 5 years) may do little more than protect the underlying fund from investment downturns, longer terms will have the impact of delivering guaranteed growth on the underlying fund. While of course actual investment returns may have been considerably higher, the cautious customer may prefer the certainty of maintaining their fund rather than the risk of loss or gain.
If the customer were to break the term of a temporary annuity then they lose the guaranteed maturity value. In such a case they would get back the original amount they placed into the product less any lump sums and income taken. However Best Pension Annuity’s preferred temporary drawdown provider will allow the contract to be terminated by the customer if certain lifestyle issues occur, one of which is if the customer qualified for an enhanced annuity. In this case while the full guaranteed will not apply, if the customer has been with the company for a few years some allowance for growth (assuming markets have grown) is allowed.
What all this demonstrates is that as our lifestyles, health, and life expectancy are changing, so are the choices we need to make about how best to utilise our retirement savings. The team at Best Pension Annuity are more than willing to talk to any customer on a non-advised, no obligation basis to explain further the concepts discussed in this article and how the products discussed function and operate. Caqll them now on 020 33 55 4827