At retirement, having first taken the pension lump sum, the balance of your pension funds can be used to purchase an annuity – a guaranteed income for life. Annuities are initially guaranteed to be paid for five to ten years and if the annuitant dies during that time the income continues to be paid for the remainder of the guaranteed period. If the annuitant survives the guaranteed period, the income will be paid until they die.

When calculating the underlying annuity rate – the rate at which your capital is converted to an income, the company actuary takes into consideration the following:

  • Bond yields – which will determine how much income the company can expect to receive on the purchase price. If bond yields are low, the pension will be lower. If bond yields are high the pension will also be higher.
  • Morbidity rates – which will determine how long you will live and for how long the company is likely to have to pay the pension. Generally, younger ages receive a smaller pension than older ages, for the same purchase price.

Morbidity [how long you will live] is not just dependent on your age. Enhanced annuities recognise that other factors will need to be taken into account such as your current state of health and your lifestyle. Where your health is poor to average, your life expectancy is lower than those in good health. Therefore an enhanced annuity product will take account of that fact and increase the amount of the pension you might otherwise receive.

It is not just people currently retiring who should check if they qualify for an enhanced annuity. Those with Approved Retirement Funds [ARF] should also periodically check if they might be better off converting their ARF to an annuity. This is particularly the case now when cash deposit rates and bond yields are low but your income requirement remains constant. Your financial broker will compare and contrast the effect of lower investment returns on your invested capital income against your future income requirements and advise what is best for you.