Enhanced annuities

Unlike most financial products where having poor health or lifestyle can end up being more expensive, enhanced annuities can actually use these things to your advantage, giving you more money – rather than less – in retirement. That's because they work on the principle that if you won't need your income for as many years, they can pay it out at a higher rate.

What is an enhanced annuity?

An enhanced annuity pays you a guaranteed income during retirement that is guaranteed for life. There is no investment risk attached with an enhanced annuity and you can buy one with a pension pot that’s as low as £2,000.

Commonly referred to as simply ‘an enhanced annuity’, this product is different to a standard annuity in that the income level provided is dependent on your health and lifestyle. If you qualify for an enhanced annuity, it will almost certainly give you more income than a standard annuity, particularly if you shop around for the best deal.

Who can get an enhanced annuity? Can I get an enhanced annuity?

Enhanced annuities are provided on the basis that various factors will influence your longevity – how long you're likely to live. This includes where you live, if you smoke or drink, your lifestyle and your medical history.

So, do you smoke? Have you ever smoked? Are you overweight? Do you regularly take medication, have hereditary illnesses, or have you experienced ill health in your lifetime? Even relatively minor factors affecting your health or lifestyle could affect your ability to purchase an enhanced annuity, and see you receive a higher level of income in retirement. To help you understand a little more about the impact of health on the length of time you will live, why not take a look at this short film:

How do enhanced annuities work?

You'll need to answer a medical questionnaire, which explores your health and circumstances in detail. This underwriting process is something that's organised relatively easily by a professional adviser, who can also approach enhanced annuity providers on your behalf to try and secure the best deal for you.

When annuity providers understand the influences on your potential longevity (the things that may affect how long you might live), they'll make an offer that's appropriate to your circumstances. Startling as it may sound, if you're not likely to live as long then, quite simply, you'll receive more each month in income in exchange for the same amount of pension savings.

To give you an idea of how enhanced annuity rates compare to standard or conventional annuity rates, you can take a look at the annuity comparison tables on the Money Advice Service website.

Advantages of enhanced annuities

  • You can still take up to 25% of the value of your pension pot, free of tax, before you commit to an enhanced annuity.
  • If you're eligible, then you'll receive a higher income than you would with a standard annuity.
  • You won't outlive your money and your income is guaranteed to be unaffected by rises or falls in the stock markets.

Disadvantages of enhanced annuities

  • Once you've bought this annuity, it can't be changed or swapped for another product.
  • Annuity rates change all the time and it's impossible to know what will happen to them - they might go up or they might go down. So while it may make sense to wait until you are older (when you might get a better rate because of your age) you can't really know for sure whether you would have got a better deal earlier on when rates were better. 

Is it hard to get an enhanced annuity?

It's probably easier to qualify than you think. There are many different medical and lifestyle conditions that providers often take into account before they make you an offer, either alone or in combination.

Even things like relatively mild health conditions (high cholesterol for example), could present an opportunity to secure a higher level of income, guaranteed, for the rest of your life.

What should I do next?

If you are interested in an enhanced annuity, then we recommend you speak to a professional financial adviser.

All professional advisers are bound by law to keep your personal circumstances private and confidential, so you can speak to them about lifestyle factors and health issues in complete confidence. You’ll find professional financial advisers who are local to you on unbiased.co.uk.

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