Annuity Hound

These special category annuities offer even better rates of return than are available with enhanced annuities. People eligible for these annuities will be those suffering from medical conditions that result in a much higher mortality rate than those entitled to purchase an enhanced annuity. Eligible purchasers of impaired annuities might be suffering from a ‘critical illness’ which typically results in a life expectancy of five years or less.Purchasers of these annuities are usually required to submit to a full medical examination and detailed medical history checking. These annuity policies are fully underwritten on a case by case basis.

With such a short life expectancy, even the rates of return offered to prospective purchasers of impaired annuities, which can be substantially higher than those offered to those buying enhanced annuities, may not represent good value for money in the event of an untimely death.

For those with critical medical conditions who are eligible for impaired annuities, there are two further options to be considered for those with UK pension rights:

Serious ill-health commutation

This is available to those who are aged less than 75 and diagnosed as having a life expectancy of less than one year. In this case, the sum total of the person’s pension rights can be commuted to a ‘serious ill-health lump sum’. The amount commuted is subject to the lifetime allowance test. There is no reduction to the lifetime allowance on account of age but the amount commuted is subject to taxation, at the full lump sum rate (currently 55%) if the lifetime allowance is exceeded.

Income drawdown

If the life expectancy is such that the person is unlikely to reach the age of 75, this option will leave the investor and/or his or her advisers with more control over the underlying investment which remains invested as a portfolio of mixed assets.

Maximum drawdown from this type of arrangement for UK pension rights is 120% of ‘normal’ annuity rates and may provide greater death benefits to survivors than an impaired annuity. It also provides a lower tax burden than the serious ill-health commutation lump sum option.