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Do you suffer from high blood pressure, high cholesterol or Type 2 diabetes? Are you overweight? Do you want to be richer in retirement without having to save a penny extra while you’re working?
You may have spent your life being nagged about your lifestyle, but finally – in retirement – it could make you better off. In fact, around 40% of people could get a larger retirement income without saving any extra. They just need to know how to work the system. Even if you’re in excellent health, there’s a trick that will boost your income by as much as 10%.
More than 40% of people who retire have one or more conditions that officially class them as being in less than ideal health. According to MGM Advantage, the top five are high blood pressure, a history of smoking, high cholesterol, type 2 diabetes and asthma. However, there are 1,500 conditions that will have an impact – down to small things like being overweight – so it pays to check if you have one or more of them.
While these things are not ideal to live with, they could score you a higher retirement income – assuming you plan to buy an annuity.
If you want the security of an income for life, then you can use at least part of your pension pot to buy an annuity. This involves handing over a lump sum to an insurance company, who in return pays you an income every month.
In order to arrive at the monthly sum they can afford to pay you, they’ll calculate how long they expect you to live. If you have one of these ailments, they’ll assume you’re less likely to have a long and healthy life – so you’ll be picking up your monthly payments for fewer months. It means you will have the option of an Enhanced Annuity at a much higher monthly rate than a standard one.
If you have more than one of these conditions, the effect on your income could be even more impressive – as someone who is overweight, has high cholesterol and smokes, may be able to boost their monthly income by more than 40%.
If you choose to take an annuity, regardless of your state of health, you can usually get an even better deal with another simple move – shopping around.
As you approach retirement, you will be sent a letter by your existing provider, explaining the monthly income you could get if you bought your annuity from them. However, there’s no requirement to do so, and by shopping around you are almost certain to get a better deal.
There’s an enormous variation in the rates offered by annuity companies, and it’s not uncommon to find that one provider offers you 10% more than another. This doesn’t just apply to Standard Annuities, as Enhanced Annuities can vary widely too. It means that whatever kind of annuity you qualify for, it’s always worth shopping around.
Shopping around in the annuities world is known as taking the Open Market Option.
There are a few ways to take advantage of this. The Financial Services Authority has an independent annuity comparison service; you can compare best buy rates from various providers with fund providers like Fidelity or Hargreaves Lansdown; or you can go to a specialist independent pensions adviser who will do all the legwork for you.
We like Vouchedfor.co.uk to find independent financial advisors.
Before you start shopping, you’ll have several decisions to make.
First, you need to consider whether you want a Joint Life annuity – which will pay out after your death, and will continue until the death of your partner. You can choose how much of the income continues to be paid out – between 50% and 100% of the total. The more you want your partner to receive after your death, the lower monthly payments you can expect overall.
If your partner has an annuity of their own (which will pay them sufficient income if you were to die first) you might opt for a Single Life annuity. This will give you an income for life, but stop on the day you die, and you’ll get a higher monthly payment than if you opt for a Joint Life annuity.
If you take this approach, and you are concerned that you might die young and lose out, you can have your payments guaranteed. This will guarantee a monthly income for a fixed term – usually five or ten years – regardless of whether you die. Again, this will reduce the level of the monthly payment you receive.
The second decision is whether you want your annuity payments to rise as time goes on. You may, for example, want them to rise with inflation – in which case you can buy an Index-Linked annuity. These are guaranteed to rise with the Retail Price Index and have the advantage that you won’t have the spending power of your pension income eaten away by inflation. In periods of high inflation, this is a highly valuable benefit.
The problem is that this comes at a cost. You will start out with significantly lower monthly payments, and they will remain lower for years (depending on the rate of inflation). If you don’t live long enough in retirement, you’ll never see your monthly payments reach the sum you would have received at the outset from a Level Annuity.
A compromise between the two is an annuity that rises by a fixed amount each year. This can reduce your payments less than index-linking, but with the advantage that even if it doesn’t keep pace with inflation, you will always see your income rise.
You also need to decide whether you want an investment annuity. These keep your money invested, and if the investments rise in value, you could get higher monthly payments. The risk, of course, is that the value of the investments fall – leaving you on a lower monthly income.
The risks involved have always limited the appeal of investment annuities for anyone who wants a secure income. They have held even fewer attractions since the advent of pension freedoms, as if you want to leave your money invested while you take an income, there are plenty of other more flexible ways to do it.
Since April 2015, you haven’t been required to buy an annuity at all. Pension freedoms introduced at that point mean you have a number of options. You can choose to take the entire pension pot on retirement as cash (subject to tax). You can leave it invested and withdraw a bit at a time (income drawdown). You can leave it invested and withdraw a bit at a time – using the amount you withdraw to buy an annuity (phased retirement). You can buy an annuity – or you can mix and match the approaches to find the balance that’s right for you.
A study by the Chartered Insurance Institute published in February 2016 found that 41% of people planned to mix and match, while 11% planned to spend all their pension pot on an annuity – so that more than half of them expected to buy an annuity with at least some of their pension. It’s worth pointing out that 19% had no idea what they would do – so when they come to retire, this percentage could end up being even higher.
Choosing pension income is a bit like choosing a holiday: there’s no one perfect option, and there are several that will suit you just fine. It’s important not to get hung up on finding the ‘right answer’. All you can do is read up about annuities, talk it through with your loved ones, take advice from an independent adviser, and choose the approach that you think suits you best.
This will ensure you get the maximum pension income you are entitled to, and that you steer clear of any major mistakes. Having good advice at this point can repay you several times over during your retirement, so it’s worth searching for an Independent Financial Adviser (IFAs) based near you on Unbiased.co.uk.