When the time arrives to start considering a pension plan it’s important to review the different options available to ensure you get what’s right for you and thus receive the income you deserve. An annuity, bought with your pension savings, will provide you with the assurance of a guaranteed income for life. There are however other issues that you should take into account in order for the pension to work to your full benefit: Ill-health, for instance.
If you have been diagnosed as suffering with a medical condition or if there is simply an activity within your lifestyle, such as smoking, which may reduce your life expectancy, you and/or your partner may be eligible for an enhanced or impaired annuity. Annuity rates are calculated on an individual basis and there are no standard criteria across all pension providers, but there are over 1,500 medical conditions that may qualify for this higher rate. Chief among them are cancer, diabetes, high blood pressure, stroke, Parkinson’s disease, heart problems and high cholesterol. Enhanced annuities typically produce an income boost of up to 40% on standard annuities.
It’s vital to remember though that once an annuity has been put in place it cannot be changed. For people in good health who don’t want to commit to an annuity there is the alternative option of a pension drawdown. This is the commonly used term for a flexible personal pension plan from which you can draw an income and it has in fact been officially known as Capped and Flexible Drawdown since 2011. From the age of 55 it allows you to extract the tax-free 25% lump sum from your pension plan, as with an annuity pension, but without taking out an annuity.
There are no health enhancements on the drawdown but it may produce a higher income than a standard annuity by way of its flexible nature. The main advantage of the drawdown is that you remain in charge of your funds and can continue paying into your pension plan. It offers potential for growth as your pension pot is invested in a tax efficient environment. Of course that is balanced out by a higher risk, because your funds remain invested and they may not perform as well as you hope. With the ever present possibility that health will fail in later life, a pension drawdown plan allows you to buy an annuity when you are ready.
However a new product has recently come to market that offers enhancements in respect of health issues but is still effectively managed very similar to a drawdown plan. This particular product allows you to take advantage of an higher income stream if you qualify through the impaired or enhanced route but the income is drawn off the pension fund (very much like pension drawdown), the death benefits are slightly different however – but unlike annuities where including spouse benefits can reduce the initial income – the members’ starting income would not reduce – and the spouse would still receive 100% of the income on death (however this similar to pension drawdown and is dependent on size of fund ,age & health).
If you have any interest in respect of the above please make an enquiry through the website – www.understandyourpension.co.uk
Robert Van Der Does is freelance financial journalist.