Enhanced annuity – What they are and how to get one?

In a time of uncertainty, financial security is key. People are looking for reliable ways to secure their future income. Depending on your circumstances, an enhanced annuity could offer a powerful boost to your retirement income.

Here, we’re going to talk about how you may be eligible for more than you think at retirement, and exactly how to check.

You’ve saved into a pension, and you know what you’ve got in your pot (or pots). Now what?

An annuity is sometimes seen as a 'traditional pension', in that it pays you an income for the rest of your life. You can buy one with the money from your pension pot. The level of income you receive will depend on the amount of money you buy it with and the rates offered by the provider, with factors such as your health, lifestyle and where you live often coming into play. It's important that you do your research and 'shop around' to make sure you get the best deal available to you.

An enhanced annuity takes things up a notch. Because an annuity pays an income for the rest of your life, providers will estimate how long you are likely to live when working out how much income they can offer you. They'll ask for details of any health conditions and lifestyle choices that might affect your life expectancy. If a provider thinks any of these factors could shorten your life, they may decide to offer you an enhanced annuity, which pays a higher income than the standard rate.

There are pros and cons to everything, and ultimately the end choice is always yours. So even if you’ve sat and done all your research and you’re still not sure, there are people you can ask. You may already have a financial adviser to speak to, but if not, you can find one at Unbiased. You can also speak to our advisers, just be aware that any recommendations our advisers make will be for products from Aviva and carefully selected partners. For more support you could also check out our article about financial advice. Or to get free, impartial guidance speak to Pension Wise.

Here are some things to consider: 

Reassurance

The most attractive thing about annuities is that they guarantee you an income for life. So, you can wave goodbye to outliving your savings. In most cases, you can choose to have an income that pays out at a fixed level for the rest of your life, or one that starts lower, but increases over time, either at a fixed rate or increasing in line with the ‘Retail Price Index’ which is a measure of inflation.

Looking out for your family 

You can choose an annuity that pays out for your lifetime only, or one that continues to pay an income to your partner or dependant after you die. Some annuities also offer a 'value protection' option, which means they guarantee to pay out at least as much as you have paid for them - so, if you die before you have received that much, the remainder will be paid as a lump sum to your estate. Both of these options need to be put in place from the outset and will reduce the amount of income you receive yourself.

On the flip side, there are always things that might make them not work for you:

Long-term commitment

It's essential to remember that buying an annuity is a lifelong commitment. Unlike other retirement options that may offer flexibility, once you have set up an annuity you can't usually change it or cash it in. So, taking the time to consider your retirement needs and wants is crucial. 

Potential inheritance complications

Typically with a standard annuity your income stops when you die, meaning there would be nothing going towards inheritance. You can opt for extra support for your family when you pass away. You might want to leave it to someone who relies on your income or pay it out as a cash lump sum if the annuity has paid out less than you paid for it. However, you’d need to put this in place when you first set the annuity up.

Value for money

If you choose an annuity that pays out for your lifetime only and has no 'value protection' attached, then, depending on how long you live, you might get back less in income than you paid for it.

There are several factors providers may look at when working out whether you can get an enhanced annuity. But it’s very important to check, it could be the difference between extra money to enjoy your retirement and potential financial worry. For example, having type 2 diabetes could boost your income by 30%.
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You are more likely to be entitled to an enhanced annuity if you:

• Are or have been a heavy smoker
• Are overweight
• Have health conditions such as:
  • Stroke
  • Cancer
  • Diabetes
  • Heart attack
  • Kidney failure
  • Chronic asthma
  • Multiple sclerosis
  • High blood pressure
  • High cholesterol

And if you’re considering an annuity as an option, make sure you tell your provider about any of these factors. It's quite common for people to under-disclose their health details when applying for an annuity. At Aviva, we found that around 25% of our customers in 2022 didn't tell us something that could have led to us offering them a higher income.

When you call to ask for a quote from a provider, check if they offer  enhanced annuities, and go from there. The best way to boost your income is to come prepared with as much information as possible, including medical letters or hospital reports if you have them available.