Adrian Garside

An annuity is a product that gives you a pension income when you are old – if you save up in a  pension, when you want to draw the income, you ‘Buy an Annuity’.

The annuity guarantees to give you an income until you die. You may live a couple of years, you may live until you are 110, the annuity will still pay. Mind you, if you do die early, the annuity dies with you and once chosen, the terms of the annuity can’t be changed.

The new government has announced that it will scrap the maximum age (currently 75) for choosing your annuity.

Scrapping the maximum age for taking the annuity provides additional flexibility when planning your pension and is just as important for people with small pensions as large, maybe more so.

Here’s why.

If you are statistically normal – ie healthy – the annuity provider knows that if you are a man you will die at age 84 and if you are a woman, you will die at age 87.

However, we all know that if you smoke, you will die earlier. So, some companies will offer an ‘Enhanced Annuity’ to smokers. For example, if they think a smoking man will die at say, 80, they know they they will have to pay out for a shorter time and will be able to afford to give our man a better pension income. I have often thought I might start smoking when I’m about 63…

Now you can also get an Enhanced Pension if some form of ill health affects you, I saw a chap last week with heart and kidney problems, I’m expecting to be able to get him an awesome pension – the worse the state of your health, the shorter your ‘statistical’ life expectancy. You can get pensions 30% or more better with an Enhanced pension and 30% extra money in retirement isn’t to be sniffed at.

But, most of us are pretty healthy at age 65. What if we choose our annuity at age 65, and become ill age age 68? If only we’d waited we could have got a much better pension.

Well, a strategy worth considering at age 65, is to organise a “temporary pension” and review at, say age 70, and then again at age 75. If you were still healthy at age 75, well, up until now it was tough, you had to commit to whatever was available.

Now you don’t, and that may quietly revolutionise pensions strategies.

Think about this for a second, because it will help explain what I am on about.

You know with life insurance, if you smoke, or you suffer ill health, or like me you have eaten too many cakes and people say ‘You’re looking well’, the insurance companies make your insurance more expensive – well that’s because they reckon you will die earlier than the health freaks (ie, you may be “looking well”, but you may not last long), and so they stand a greater risk of paying out a claim.

Pensions are the opposite of Life Insurance. With Life Insurance they collect money while you are alive and pay out when you die.

With pensions they are paying out cash while you are alive, so will reward you if you are likely to die early.

So, if you smoke, or you are a bit portly, or you have health issues – any health issue, there is a decent that an “Enhanced Pension” may be available to you.

Now most people, when they get to retirement take the 1st pension they are offered, thinking they have no choice. The  pensions companies know this, so rarely offer a good pension, let alone an enhanced pension. Why should they?

Now, bearing in mind, the pension decision is your last ever pay negotiation, you can see how important it is to get it right – especially if you can qualify for an enhanced pension.

Most people could do better by shopping around anyway.

40% of people could qualify for an enhanced pension.

An enhanced pension could produce a pension income a third higher for the rest of your life. That’s a 33% payrise.

So please, when the time comes to take your pension, see an IFA. Preferably me, but if not me, any IFA will do.