What is an enhanced or impaired pension annuity?

Improved pension income for those in poor health

What is a pension annuity?

A pension annuity is a secure retirement income. Those retiring with a pension pot will be presented with a range of options to convert that pension into an income stream. One option will be to ‘purchase an annuity’.

Buying an annuity is essentially the process of ‘selling’ your pension pot in exchange for a guaranteed lifetime income. Naturally, those who live a long life are better-off with an annuity than those who die early in retirement. However, that’s the gamble of retirement security. If you have a strong desire for long-term financial security and want the peace of mind provided by a guaranteed regular income for the rest of your life, you will probably keenly explore the annuity option.

Annuity rates in recent years have been very poor, with many insurance companies exiting the market altogether. Most pension savers are leaning toward income drawdown, keeping their pension pot while drawing an income. However, it remains worthwhile for those with medical conditions to explore their qualification for an uplifted rate.

Enhanced & Impaired Life Annuities

Clearly the risk of buying an annuity is not living long enough for the sale of your entire pension ‘pot’ to have been worth it. That’s why enhanced and impaired life annuities were introduced.

Those with a reduced life expectancy can apply for an enhanced annuity rate.

This works essentially in the opposite way to life cover. While completing a life or health insurance application, one likely plays down any medical conditions in case of a higher cost. Annuity applicants will be keen to disclose as many medical conditions and poor lifestyle choices as possible to increase their pension income!

Some providers and IFA firms report up to 50% of applicants qualify for an enhanced annuity rate, with uplifts available for all sorts of reasons including smoking, poor family medical history or diabetes.

If you think you could qualify for an enhanced rate, it’s certainly worth exploring. Don’t accept the first annuity rate offered solely by your existing pension provider; search the market and you may find a higher lifetime pension income. Read our guide to retirement options to find out more about at-retirement planning.


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