13th June 2013
If you are unfortunate enough to have a long term health condition and are approaching retirement, there has always been some financial consolation in the fact that you can get a better annuity known as an enhanced annuity. You will receive an enhanced rate even for what may seem to you as a relatively minor condition or even if you smoke.
The calculation by the insurer is that because you won’t live as long, or at least are statistically less likely to so, they can pay you a higher annuity income.
Of course, this upgrade for ill-heath does not apply generally where you keep your money invested in an income drawdown plan. But some financial firms that offer drawdown would like health factors to be taken into account now.
Up till now with drawdown, whether you are in fine fettle or unfortunately on the home straight to a better place, the absolute maximum you can take out is governed centrally by the Government Actuary’s Department.
The amount you can take out in any year, has actually had an upgrade increasing by about a fifth on the previous amount (or 120 per cent of GAD), but the emphasis of Government policy if you are in either flexible or capped drawdown is to make sure that you have enough in your drawdown plan to ensure you do not fall back on to means-tested state benefits.
The Government sees that as the price you pay for all that tax relief you received over the years, though of course for higher rate taxpayers that relief is becoming progressively less generous.
Now a couple of providers are calling for a rethink suggesting that you should be able to take advantage of more of your investments depending on ill-health. Drawdown firms InvestAcc and Rowanmoor have just called for an overall as trade website FtAdviser.com reports.
On first hearing, this sounds fair, but there are big differences between the two regimes, though they couldn’t ever be identical. A lifetime annuity lasts for a lifetime – that is at least partly the point of it – because it guarantees a certain amount of pension until you die. Drawdown involves the management of several factors. Many advisers counsel against taking out the maximum currently permissible each year, because it could mean individuals storing up future financial problem.
And another big pension provider has come out against the proposals.
MGM Advantage says that if people were allowed to take greater incomes from drawdown due to their health, there is a real risk many could either run out of income or see their income fall very significantly, if they live longer than predicted.
Andrew Tully, Pensions Technical Director, says: “Ill health should be a key consideration as people move into later retirement. Drawdown does not currently take into account lifestyle or health conditions. But simply allowing drawdown to pay higher incomes when health is poor creates a very real risk that people will run out of money, potentially falling back on state benefits. If people want to take their health or lifestyle into account a ‘pooled’ concept is needed, alongside some underlying guarantee of income for life. Drawdown provides neither. But a solution already exists either by using enhanced annuities for those who don’t want investment risk, or investment-linked annuities, using enhanced terms, for those looking to continue exposure to equities. This has the added advantage of the valuable mortality cross subsidy built into an annuity, which can be worth 2% a year for a 75 year old, substantially reducing risk for older people.”
The Mindful View
While the boffins argue about this, it probably is unlikely that the Government will change things near term. The system strikes us as simply too complicated to set something up that protects consumers, but also takes into account their changed health circumstances within the already complex and controversially drawdown regime. There are other solutions available – including what have been called a ‘cocktail’ – you might buy an enhanced annuity with part of your part and keep the rest invested for example. The investment linked annuity with enhanced terms can give you a bit of both worlds as Mr Tully argues. For younger retirees, if you feed in a continuing income from a part time job, then the calculations change again. But if you want some benefits to accrue, and are in the drawdown bracket, it might also be best to consider taking financial advice about your retirement options, even if up till now you have been mostly a self directed investor.