State pensioners who smoke handed £412 a year boost | Personal Finance | Finance
State pensioners who smoke could get more money in retirement if they make one change to the way they fund their income in their old age.
Annuities are a popular pension product which many older people take out using their private pension pot funds in a bid to supplement their standard state pension income from the DWP.
An annuity takes your pension pot and converts it into a guaranteed annual income which usually pays more than if you keep the money as a lump sum and access it yourself because an annuity continues to be invested.
The downside is that the money is paid out gradually over several years and if you die earlier, you miss out on the rest of the money (unless you have certain types that will pay out to your estate) and you cannot pull the plug on an annuity and reverse the decision later.
But an unexpected upside of taking out an annuity is that if you smoke, or have made other poor lifestyle choices, or suffer from a health condition, you could get paid more money than a pensioner in perfect health. It’s effectively the inverse of life insurance, where you pay less when you’re healthier.
As explained by life insurance firm LV: “A pension annuity is a Lifetime Annuity you can buy using the money from your pension pot. It will pay you an income for the rest of your life. To be able to receive a pension annuity, you must be at least 55 years old and have at least £2,000 to invest after you’ve taken any tax-free cash.”
According to SharingPensions.co.uk’s estimates, a single smoker aged 70 to 74 would get £9,090 per year on average from an annuity (assuming they have a £133,000 pension pot).
But a non-smoker on a standard annuity from the same investment pot would be paid only £8,678, which is £412 per year lower.
LV adds: “If you’re a smoker, or in poor health, you may be able to benefit from an enhanced annuity or impaired life annuity which pays a higher income based on a reduced life expectancy.”
About enhanced annuities, it adds: “An enhanced annuity, also known as an impaired life annuity, gives you more income in retirement based on your health and lifestyle choices. Essentially, it gives you a way to earn an income from your pension with payments determined by your medical history, lifestyle choices and current state of health.
“If you’re a smoker, over or underweight, live in certain postcodes or are in poor health, you may be able to benefit from an enhanced or impaired life annuity, which pays a higher guaranteed income for as long as you live, based on a reduced life expectancy.”
