People with poor can benefit the most

For those buying their annuities now higher incomes are offered for lifestyle medical conditions such as high blood pressure, Cholesterol, smoking ten or more cigarettes per day or by being overweight an enhanced annuity can offer an 18% higher income.

This varies depending on age and for a fund of £100,000 with single life annuities those aged 55 receive increases of 14% and those aged 75 increases of 22% over the highest standard rates. For joint life annuities those aged 60 receive increases of 10% and those aged 75 increases of 16% over the highest standard rates.

An impaired annuity would take into account life expectancy which is reduced for serious conditions such as heart disease, diabetes and cancer offering up to 40% more income than the highest standard rates in many cases.

FCA concerned with existing insurer sales tactics

People retiring are offered pension annuities from their existing providers and since March 2013 the Association of British Insurers (ABI) require the open market option to be promoted giving people the opportunity to shop around.

This includes letters to be sent two years, six months and finally the current six weeks before the retirement date. There is also a requirement to show the amount of income that could be offered from other options including people with medical conditions.

Despite these efforts insurers use sales tactics to pressure people to accept their annuity offering poor returns for their lifetime. These may be giving time limits to accept their offer, such as two weeks, otherwise the offer will be withdrawn and presenting the documents so as to promote their annuity and not the open market option.

As a result these people could be losing money as 80% could receive more money elsewhere. For example, for a person aged 65 with a fund of £100,000 could receive a single life, level annuity with an income of £5,310 pa from their existing provider. If they buy an open market option this would be £740 pa more at £6,050 pa.

In terms of lifetime income, the Office of National Statistics (ONS) would expect a male to live for 17.3 years and he will have £12,802 less over his lifetime. For a female she can expected to live for 20.4 years decreasing her income by £15,096.

In the future FCA will be more active at fining insurers that abuse the process. Until then people retiring would benefit by using their open market option as this could significantly increase their income in retirement.