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Honesty is the best policyCreated by Verity in Retirement and pensions
The Art of Getting More Income in Retirement: Part 2
When you reach retirement and you want to start receiving an income from your pension, sale you have a choice over which product you use. The vast majority of people choose an annuity. There are other products available which I will explore in later articles. In the last article we warned of the dangers of staying with your pension provider and that you should shop around for your annuity. This article explores the “black arts” of how annuities are priced and why it is REALLY important that you tell all about any health or medical ailments you may have.
Now this is going to sound a little morbid but I will try and make it painless. An annuity is an insurance contract for life whereby the insurance company gives you a guaranteed income for the rest of your life. Therefore annuity companies try to assess how long people are going to live. They do this by asking a range of questions, for example they use your postcode as an indication of how wealthy you are. Wealthy people on average, live longer than poorer people, therefore if a two people had £50,000 in their pension at retirement and one person lived in a poor area of Glasgow and the other in a wealthy suburban area in southern England. The person in Glasgow would receive more annuity income each year. Now before you all think about moving to Scotland, the difference in income assuming everything else is the same would not pay for the expense (estate agents, solicitors, transport etc) of moving.
The key difference in annuity rates will be driven by your health. Annuity rates are determined by how long an average healthy person would live and then this figure is adjusted depending on the severity of your illnesses. If your medical conditions reduce the estimated life you will have in retirement then you will receive more income each year because the annuity company believes that you will not live as long as a healthy person. This is different to every other area of insurance. Usually when you declare any medical conditions you are penalised for it. With annuities it really does pay to be completely open and honest as you will never receive less money in retirement for declaring the illness (not unless there is an illness which makes you live longer!!). The payments can only go up.
It is an area here at www.happy2retire.co.uk that we encounter all the time. Customers are initially hesitant to declare all the medication they are on or are bashful on their weight, how much they drink, or how much they smoke. It is only after we explain that they could benefit that we receive the information. To give you an example of the difference it can make for very minor health differences lets create a fictional character. Pete is aged 65, married and has a £50,000 pension fund at retirement and lives in York. The best annuity rate at present if Pete is healthy is £3,075 a year (this would still be better than his pension company annuity rate). If Pete is 5ft 9in and weighs 15 stone, smokes over 10 cigarettes a day and drinks 40 units a week this goes up to £3,632 a year which is an increase of nearly 20%. If Pete has any other conditions such as diabetes, high blood pressure, suffered a stroke etc, then the payments could increase even further.
It is not often, especially when buying an insurance product, that being honest about your health really is the best policy. However when buying an annuity you really should disclose everything. You may even want to consider a health check at your local GP before you retire so that you have all the information such as blood pressure and cholesterol available. The next step would be to speak to an expert such as www.happy2retire.co.uk. They are extremely knowledgeable about health conditions and medication and will guide you through the often complex questions. Just remember, don’t be shy about your health – it may cost you 20% more a year for the rest of your life.