Nigel Barlow highlights how asking extra questions about a client's health can lead to further enhancements in retirement income
The growth of enhanced annuities is now well established and well documented. From a low base, the proportion of people obtaining increased retirement income recognising their state of health has risen to over 18% of the total buying annuities at the end of 2011. While estimates of the proportion that could qualify vary, they all indicate that there is still huge potential for growth.
The Health Survey for England reports that, happily, there has been an increase in the number of men who have never smoked, from 39% in 1993 to around 50% in 2010, while 59% of women now report never having smoked.
Even allowing for changes in surveys, this is a significant improvement. The HSE Adult Trend tables show that 22% of men and 18% of women are current cigarette smokers. In the 55 to 64 age group, the proportions drop to 18% and 16% respectively.
It's easy to disclose that you're a smoker - although many people would probably rather not. According to the General Lifestyle Survey, when asked about daily cigarette consumption, people have a tendency to round down the actual number to the nearest 10, so not only may the prevalence of smoking be under-reported, so may the level of consumption.
If this happens in an adviser's office, it could affect the rate an annuitant sees.
Perhaps more important, though, is the range of medical conditions that smoking may bring. Under-declaring these really can cost.
In 2009/10 there were around 1.5 million hospital admissions in England among adults aged 35 or over with a primary diagnosis of a disease that can be caused by smoking and of these 461,700 were estimated to be attributable to smoking. The breakdown of the latter figure throws light on the conditions that could lie behind a simple declaration of smoking:-
• 166,000 cancers attributable to smoking, including 68,000 trachea, lung and bronchial cancers
• 116,000 respiratory diseases, including 82,000 chronic airway obstruction
• 141,000 circulatory diseases, including 69,000 ischaemic heart disease
• 18,000 diseases of the digestive system
In the annuity market it is accepted that smokers will qualify for an enhancement but what about ex-smokers?
75% of all adults who smoke have tried to give up at least once. 26% of them tried to give up in 2008/09. Some of them have succeeded (some have succeeded several times).
Those who have given up later in life may still find there has been an impact on their health - and their life expectancy, particularly if they had smoked for a long period or in large amounts.
From an adviser's perspective, it's worth asking if the client had smoked, say, in the last ten years and then to suggest completing a medical questionnaire. In the Adult Trend Tables, 28% of men and 23% of women reported having smoked cigarettes regularly at some point (and having given up).
Weight is another factor. With 34% of adults aged 55-64 reported as being obese and 41% overweight, once waist measurement is taken into account 40% of all adults over the age of 16 are classified as having a high or very high health risk. In 2009, high blood pressure was recorded in 51% of men and 46% of women in the obese group, compared to 20% of men and 15% of women in the normal weight group.
NAO figures for 2006 show the following risk factors of developing selected diseases relative to the non-obese population in England:
What effect will this have on income?
If we assume a male aged 65 with a fund of £50,000, height of 1.83m
These rates are taken from Avelo and, in some cases, waiting for individual underwriting could yield even more. There's clearly quite a difference here and, from the client's point of view especially, a few minutes completing the details could result in a big difference.
Research shows, however, that many are completely reliant on their adviser to make them aware even of the availability of enhanced annuities.
If advisers withdraw from the small funds segment, or the cost of advice exceeds the ability of clients to pay, there is a significant risk that not only will they miss out on the finer details of enhancements but will forego enhancements altogether, possibly reversing the trend to greater take up both of enhancements and of the Open Market Option that some have worked so hard to attain.
Nigel Barlow is director of product development marketing at Partnership
EIS and Seed EIS sectors
'Truly making a difference'
Avoidance, evasion and non-compliance
From 6 April 2019