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24 February 2014 last updated
Enhanced annuity rates 2.5% higher as providers now more competitive

Enhanced annuity rates have improved from providers Just Retirement and Partnership with increases of up to 2.5% even though gilt yields have disappointed.

Annuity rates are based primarily on the 15-year gilt yields and as a general rule a 10 basis point change in yields will result in a 1% increase or decrease in rates.

During February yields are up by only 6 basis points yet providers of enhanced annuities have been aggressive at improving their rates.

After a sluggish start to the year providers have been adjusting their book of business, reducing rates for some medical conditions where providers are overweight in their business and increasing rates for others.

This have resulted with improved rates for many people retiring now with more serious health issues such as diabetes, heart and cancer conditions as leading providers adjust their business models.

Enhanced annuity rates higher
  Enhanced annuity providers have increased rates by up to 2.5% for many medical conditions
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Poor health can add 40% to annuity income

For people with more serious health conditions including strokes, cancers, diabetes and heart conditions and especially when there are combinations an impaired annuity can add 40% or more to the income offered by an existing provider.

Even for lifestyle conditions such as smoking, high blood pressure, Cholesterol and being overweight an enhanced annuity could offer up to 18% more income than a standard annuity.

For example a person aged 65 with a fund of £100,000 could buy a 3% escalating annuity with a standard income of £3,958 pa. If they also had high blood pressure and Cholesterol and was prescribed three medications the income would be 19.5% higher at £4,731 pa and this has now increased by £125 pa or 2.6% to £4,856 pa. This is now 22.6% more the standard annuity.

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 £2,162 more over his lifetime. For a female she can expected to live for 20.4 years increasing her income by £2,550.

Improving equities also helps fund values

The FTSE-100 index reached a low for the year of 6,458 at the beginning of the month and has since recovered 408 points or 6.3% to 6,866.

For those that remain invested and track the index until they buy their pension annuity will find they will receive more income. For example, from the above example a fund of £100,000 at the beginning of the open market option process would now have increased to £106,300 and the income higher at £5,162 pa. The combination of rising equities and annuity rates would mean they would be better off by £431 pa or 9.1% in a matter of weeks.

Equities are at a 14 year high and close to the all time record of 6,930. The index has been close to the record before but has never broken through this resistance level.

For those retiring and taking their benefits now should consider transferring their funds to money market or cash funds to avoid any sudden fall in their fund value. Any fall in the fund value will be reflected in the annuity income which may be lower than they were expecting.

News related stories:
UK annuity income is 2.4% lower as FTSE-100 index falls
Impaired annuity rates up 1.5% from Just Retirement with higher yields
Enhanced annuities rise 1.5% after strong gains in gilt yields
Related internet links:
Telegraph - FTSE 100 climbs to 14-year high
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