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An annuity enhancement – The upgrade option

Posted by on December 8, 2011

The first annuity will soon be launched allowing individuals to upgrade to a higher rate should they fall ill. As it stands at the moment most retirees could find themselves locked into an annuity contract which will not take a health decline into consideration. This could be set to change under these “next generation” annuities. Retirees whose health worsens could now have the option to break their contract and upgrade to a better rate – which could provide them with more return from their pension income. For some, health can deteriorate from the age of 65, so this added flexibility could prove appealing. Some providers may only offer this on their fixed term annuities, not on lifetime annuity products, so seek advise before purchasing.

Lets look into the following scenario as an example:

A man of 65 began to suffer a range of medical problems after purchasing a ten-year fixed-term annuity with his £50,000 pension which provided him with an income of £3,041 per year. Since purchasing the annuity, he has undergone bypass surgery, acquired angina and began taking a medical prescription regularly.

Usually, his decrease in life expectancy would not have been considered – yet with this possibly new flexibility feature, his income could be reassessed, resulting in a potential increase to his yearly income. It is also believed the more serious the health decline, the larger the increase in yearly income.

You should always seek advice or conduct thorough research before making a decision. The devil is often in the detail and the costs are likely to vary to entail this level of flexibility. You must also remember that by switching to this ‘enhanced rate” annuity could mean foregoing the lump-sum payment you may have received at the end of your original fixed-term annuity, so remember that you could end up with less money overall. You should also be aware that the value of the fund you receive would be the value of the underlying assets of the bond portfolio. If interest rates were to rise, the value would decrease, although this could be offset by an annuity rate rise. The important fact to note is that this is an option; you can continue until the end of the term if you would like. This feature may also only be available to those selecting “plan protection” on their annuities, so do discuss this with us. This enhanced rate annuity is believed to become a standard feature within the fixed-term annuity, although is it unlikely to apply to conventional lifetime annuities, as they are priced differently.

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