Enhanced annuities: Looking to the future

Andrew Tully highlights the growing importance of the enhanced annuity market

The retirement market has changed dramatically over the past ten years. There are growing numbers of people reaching retirement with defined contribution pension pots which need to be converted into a retirement income.

Within this growing market, enhanced annuities have developed from being a niche curiosity to a mainstream product.

Back in 2003 - the first year the Association of British Insurers (ABI) kept separate data - less than 2.5% of total annuity sales were enhanced annuities.

At this point, they tended to be ‘good news, bad news' solutions, with people getting a higher income, but it usually meant their life expectancy was significantly shorter than average.

A decade of change

Today, the market is very different and enhanced annuities account for more than one quarter of all annuity sales.

This is phenomenal growth - a result of more providers entering the market and the extension of the conditions which generate a higher retirement income.

About half of MGM's enhanced annuities are classified as ‘light impaired'. This includes conditions as mild as high blood pressure and high cholesterol - issues that are likely to mean a slightly shorter than average life expectancy, but not necessarily conditions that stop people enjoying a long and happy retirement.

While some of the qualifying conditions may not sound immediately life-threatening, the benefit one can gain from using an enhanced annuity can be significant.

The latest findings from the MGM Advantage Annuity Index, which tracks the income paid from annuities on a quarterly basis, shows that the average difference between standard and enhanced rates is nearly 20%.
Over the typical retirement, this would amount to £9,888 for men and £10,569 for women, based on a £50,000 pension pot.

These figures demonstrate the importance of shopping around for the best deal when buying an annuity. It is essential that health is taken into account into account when doing so.

As mentioned earlier, enhanced annuities make up a quarter of all annuity sales. But this hides a huge disparity. When people take advice and shop around, about 45% buy enhanced annuities.

In comparison, a paltry 1% of those who don't shop around end up with an enhanced annuity.This is a massive issue which cannot be ignored, as it shows too many people are getting a poor deal.

Taking independent financial advice is the best way to achieve the optimum solution that suits people's individual circumstances.
With flexible remuneration options within enhanced ¬annuities, many people will get a higher income by asking an adviser to give them appropriate advice, even taking account of the adviser's fees.

Co-ordinated effort
To make sure everyone can benefit - even those who don't have access to advice - the government, the ABI and the Pension Income Choice Association are working to ensure more people shop around and maximise their retirement income.

As part of this work, it is crucial that within each wake-up pack, we prominently display the additional income which a customer could get if they qualify for an enhanced annuity and providers - even those who don't offer enhanced annuities - need to outline the kind of medical and lifestyle situations which qualify for an enhancement.

This is crucial as research by MGM shows that almost three-quarters of adults age 55 and over are unaware they could be entitled to a higher level of retirement income due to their health or lifestyle.

With standard annuity rates on a downward trend that seems set to continue, and given the current economic climate, it is more important than ever that people shop around.

Full online underwriting for enhanced annuities will help, as it allows advisers to get an enhanced annuity quote as simply and easily as getting any other annuity quote.

We know most people will continue to buy some type of annuity in future, so making sure eveyone is aware of enhanced annuities and knows the financial benefit they can bring seems a simple step. We just need everyone to take it.

Andrew Tully is pensions technical director at MGM Advantage