For thousands of savers enhanced annuity rates are the silver lining to a dark cloud of rock-bottom retirement income projections. If you have a medical condition that could shorten your lifespan you can receive a higher income from your pension. Conditions such as heart disease, cancer, obesity or diabetes make you eligible for annuity payouts as much as 50 per cent higher than a healthy person.
An enhanced rate means a higher income for the rest of your life and estimates as to what percentage of the population are eligible vary from around half to two-thirds. In order to qualify, all you have to do is declare your medical conditions via a form in order to be considered. So it's simple, right?
Wrong. According to Legal & General, around 70 per cent of people who fill out the medical questionnaire (out of the 100,000 people who apply for an enhanced annuity each year) are accidentally short changing themselves by missing out vital information which could mean the difference between them qualifying for a higher rate and settling for a regular payout.
It's a staggering rate of error, but a glance at the complex quotation request forms explains the surprising level of confusion among retirees. Often exceeding 15 pages in length and peppered with medical jargon, savers get lost when filling it out and are left to blindly wander into a trap that could irreversibly reduce their income. Disturbingly, those missing out are often completely oblivious to their loss, while their pension provider silently swallows the extra income they could have enjoyed.
The providers know not all the data they receive is optimal, but it is not something that stops them turning down business. It's hardly astonishing they aren't willing to hold your hand all the way to the bank - but if you think you can breathe a sigh of relief because you're receiving guidance from a financial adviser, think again.
Legal and General claims that around the same percentage (70 per cent) of the medical questionnaires it receives through financial advisers are missing "potentially important" information, meaning you could still be vulnerable to making costly mistakes, even though you're paying for advice. And Andrew Gething, managing director at tele-underwriters MorganAsh, says most advisers are helpless wading through the impenetrable medical jargon on enhanced annuity forms.
What can you do?
You don't have to fall into this trap. There are over 7,000 medical conditions that could entitle you to an enhanced annuity rate and, if you're aware your health could have a bearing on your pension, you're already more clued up than thousands of pension savers.
Graham Cross, managing director at independent financial adviser (IFA) Helm Godfrey, warns that the game is over before it has even begun for retirees who don't understand the process. "Often, people walk into a meeting with their adviser and announce there's 'absolutely nothing wrong with me', meaning they are likely to be automatically discarded from the process," he says. So the first thing you must do is realise your health will affect your annuity rate.
The next thing you need to do is shop around because not all providers offer the same kind of enhancements. For example, Legal & General does not take into account all 'lifestyle choices' such as smoking or heavy drinking, whereas Just Retirement does.
Shopping around means scouring the market for a better rate than the one you'll automatically receive from your pension provider. Your first port of call will be annuity supermarket websites that let you compare quotes from a number of different providers, so you don't have to spend ages probing individual companies. Three good places to start are www.hl.co.uk/pensions/annuities, www.annuitybureau.co.uk and www.annuitysupermarket.com and they also offer a telephone service.
Doing a bit of background reading by signing up to email alerts from these websites is also a wise move. And whether you should involve a financial adviser at this stage is up to you, but Laith Khalaf, pension investment manager at Hargreaves Lansdown argues that as long as you know admitting your health complaints can get you a better rate, an adviser won't be able to help you get an even bigger one.
Take, for example, Peter Foster, a 67 year-old former camera repairer from Eastbourne, who had a near miss when it came to buying his annuity. Having already been quoted a rate, it was only when his adviser at Olympus explained that the fact he'd suffered from a heart attack and smoked 50-a-day meant he could be considered for an enhancement, so he shopped around. And when Mr Foster was quoted a 15 per cent increase from Just Retirement, he was glad he hadn't signed on the dotted line at the first opportunity.
Once you're clued up on the best deals in the market you must ensure you present a detailed and accurate medical profile of yourself to the provider. The more information you provide, the less wriggle room they'll have to avoid giving you a higher rate. Bear in mind that advisers aren't medical experts so the help they can give you with completing the form is limited. Seek help from your GP or a tele-underwriter who can give you a medical assessment over the phone if you're still not sure.
Enhanced annuities present a rapidly growing opportunity to boost your retirement income - 40 per cent more retirees received an enhanced annuity in the second quarter of this year compared with the same period in 2011. But don't become one of the unfortunate majority who currently miss out on a lifetime of higher earnings by getting caught out by complexity.
