Enhanced annuities are on the rise

 [Please note, since this article was published, the government has scrapped plans for a secondary annuity market.]

As we explained in our last blog entry, “Should low rates stop me buying an annuity?”, both annuity rates and sales of annuities have been in decline. Part of this is down to reduced demand, perhaps a result of people waiting for the pension freedoms to take effect before committing to a retirement product. A guaranteed income for life removes a key concern that many retirees have – running out of money – and so annuities remain an appropriate product for many. In fact, sales of enhanced annuities are on the rise.

In the last quarter, more than a third of annuity sales were enhanced annuities, with a 5% increase compared to the same quarter a year ago. The increase in sales means take-up of enhanced annuities is at the highest level in three years, despite fewer people purchasing standard annuities.

Not only are sales rising, but the income payable from enhanced annuities is also starting to rise, following steep decline and stagnation, as the following graph shows:

Whether this trend continues or not will remain to be seen, but it seems safe to say that annuities are going to be around for a long time yet.

What is an enhanced annuity?

An annuity provides an income for life in exchange for some or all of your pension fund. An enhanced annuity does the same thing, but is for people with reduced life expectancy – it pays a higher income than a standard annuity because it is expected that payments will not be made for as long as for a healthier person.

Enhanced annuities are not available for everyone, but some of the qualifying criteria include:

  •          Diabetes
  •          Heart disease
  •          Smoking
  •          High blood pressure
  •          Cancer

If you’re looking to purchase an annuity, it’s crucial to get quotes from the open market. Research by the FCA found that 60% of annuitants remained with their existing provider, but 91% who took enhanced annuities could have done better elsewhere.

It’s also essential to seek regulated advice first, as you may qualify for an enhanced annuity and not know it, which could result in buying a standard annuity that pays you a lower income. Once you have purchased an annuity they are typically irreversible, and although the government is looking into a secondary market, this is not yet possible – and if it does happen, your annuity may not be worth what you think.

Income is not the only consideration, though. If you have a reduced life expectancy you may prefer the death benefits of income drawdown, such as passing your pension fund to a beneficiary rather than it being with the annuity provider. An FCA-regulated adviser can explain all the options and their respective benefits, helping you make the most appropriate decision for your circumstances.

Would you take an enhanced annuity if you qualified for one? Let us know with a comment below.

Call 0800 304 7288 for a friendly chat about your pension

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The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new

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