Enhanced / Impaired Annuities

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enhanced annuity

Research suggests that customers are missing out on billions of pounds by failing to apply for an enhanced annuity and that advisers could be part of the problem.

Independent research commissioned by Oxford Economics, on behalf of the Pension Income Choice Association (Pica), found customers are giving away between £3 to £7bn because of inertia in relation to annuities.

The research suggests that many clients are not claiming an enhanced annuity - which pay a higher amount due to medical conditions or lifestyle reducing likely life expectancy - even though they would qualify for one.

Bob Cook prinipal of best pension annuity, one of the internets most respected annuity providers said the failure of customers to engage with enhanced annuities showed the current open market option (OMO) system was not fit for purpose.

He said: "The research shows the potential gain that can be achieved if people shop around at the point of retirement."

Pension provider Just Retirement said that out of all annuities purchased in 2010, approximately one in five customers attained an enhanced annuity. The company said that in the occupational market this number dropped down to around one in 20.

The pension provider claimed the additional income attained by securing an enhanced annuity could be anywhere between 10 per cent up to 50 per cent for very serious illnesses.


A trial conducted by Just Retirement involving financial advisers and medical professionals showed that seven in 10 of those approaching retirement should qualify for one of these products.

Just Retirement teamed up with a network of independent financial advisers to pilot a trial scheme called tele-underwriting, which involved those who wanted to purchase an annuity talking to a medical professional over the telephone before they saw an IFA.

Just Retirement claimed customers were very happy to disclose all their details but IFAs generally did not like spending lots of time collecting this information.

Stephen Lowe, director of specialist annuity firm Just Retirement, said customers needed to specifically ask their financial intermediary or pension company whether they provided enhanced annuities and volunteer to disclose their medical and lifestyle information.

He said: "Across the market around one in five customers get the benefits of additional income by selecting an enhanced annuity.

"Our research shows the number of people that could qualify is closer to three in five and in our recent tele-underwriting pilot the number of people qualifying was closer to seven in 10.

"Tele-underwriting is a way to take the problem off the IFA. It is an example of not sitting around waiting for the the law to change but starting something practical."

Mr McPhail, said: "The tele-underwriting scheme illustrates that the industry is developing innovative solutions to help people shop around."

Time constraints

However, Philip Brown, head of retirement products at Partnership, said the problem with tele-underwriting was the time commitment required.

He said: "Be careful of how complicated you make the transaction, if you involve third parties it can be difficult. To make tele-underwriting really efficient you really have to have a single source for a range of companies.

Vince Smith-Hughes, head of business development at Prudential, agreed customers would not want to give their medical details to a whole range of companies and that coordination was needed for tele-underwriting to be successful.

He said: "I think we will see over the next couple of years underwriting become more popular. It is a step in the right direction.

"But if it really does take off people are not going to want to go to half a dozen companies so there needs to be a central pooling of information.

"There is a downside to all this as well as the more people that get underwritten and receive a better deal, the people who remain healthy will receive a worse deal as the unhealthy people will get taken out of the insurance."


Tele-underwriting is not the only solution being advocated by providers and advisers.

Mr McPhail said that Pica has proposed a "pension passport", which would outline the relevant personal and financial data about an individual and would ask them their preferential financial retirement option, such as which type of annuity they prefer.

It would also have a section about past or present medical conditions, to determine eligibility for enhanced annuities.

Once this passport has been completed, the annuitant could then more easily shop between providers armed with a broad outline of their financial position, their preferential option and a brief medical history.

He said: "Pica is advocating a pension passport to prompt people to proactively seek out a retirement solution. The passport is a catalyst and will provide them with certain key medical questions. This will help steer them to the sort of solution tele-underwriting offers."

Philip Brown, head of retirement products at Partnership, said Partnership supported Pica's proposal for pension passports.

In the meantime, instead of tele-underwriting Partnership has focused on developing an electronic application form the replace the current common quotation form.

He said: "The biggest issue is that people don't understand the existence of enhanced annuities and the phrase does not help people as it does not tell you what it does.

"The language is not helpful to customers. The current common quotation request form is 20 pages long and that is a daunting from to fill in.

"Without an adviser filling in the form is a real challenge so we have spent a lot of time getting technology that takes people through the purchase process. You can make it all electronic without an application form at all."

Mr Brown said one of Partnership's distributors used to get a response rate to the common quotation form of around 40 per cent but the response rate was now 90 per cent, which could only aid in the take up of enhanced annuities.

He said: "It shows that going down the simplicity route made all the difference."