In the new stakeholder world of transparent products where everyone is seeking to provide the best value for money, impaired life annuities cannot be ignored.
Not only do they ensure that the annuitant, whether they are buying a compulsory pension annuity or an annuity to pay for long-term care, obtains the best possible income, impaired life annuities provide IFAs and other professional introducers with the opportunity to develop new sources of business.
Annuities are often explained as being a bet with the actuary about how long the annuitant will live and consequently are regarded as a good bet only for those in good health or who come from a family with a history of longevity.
Impaired life annuities are a good bet for those in poor health, as the health and medical condition of the annuitant are taken into consideration and, if the expected life expectancy is below average, enhanced terms are offered.
Impaired life annuities are not new. They have been available for many years both for pensions and voluntary purchase. In recent years, they have gained an ever increasing profile in the national press but there are still many thousands of people who could benefit from an enhanced annuity but do not.
Why is this when it is one of the few things in life where somebody can get more without it costing them anything?
The answer is somewhere between client apathy and advisers not giving best advice. The same charge is often made of the open market option, where it is often possible to buy a substantially higher annuity than offered by the existing pension company.
Most impaired life annuities are purchased using the open market and substantially higher rates can be obtained by shopping around for the best annuity.
There are two types of impaired life annuity – those that are fully underwritten and those that operate on a tick-box system. The latter are not strictly impaired annuities. They are called lifestyle annuities because they do not involve individual underwriting, instead, they are based on a point-scoring system.
Fully underwritten annuities involve getting a medical report from the client's GP and or specialist. A specially trained underwriter will then assess each case individually and provide an annuity quotation based on the reduced life expectancy.
Although the temptation may be to avoid the extra work involved in getting a medical report by opting for a lifestyle annuity, the only way to ensure the best possible terms are secured is to go for a fully underwritten annuity.
The overall size of the pension annuity market is estimated to be £6bn, of which less than 10 per cent is currently written as impaired life annuities. But there are probably many more people who could qualify for impaired rates if they were made aware of their options so there is huge potential for those advisers who can tap into this market.
The process of funding care fees can be an expensive and arduous task. They are usually met either from savings or the proceeds generated from the sale of the property that was previously owned by the person receiving care.
Many people leave the money on deposit and draw against it each month. This can, however, prove to be a risky business. As care standards improve and mortality rates in the older generations decrease, many people face the prospect of outliving their capital if correct investment decisions are not made.
The subject is of such great importance that a royal commission was set up, with the purpose of finding the best solution to the funding problem. A number of recommendations were made to the Government and in July last year proposals were announced that it is hoped will lighten the financial burden on those faced with escalating care fees.
However, these proposals were not as far reaching as hoped so the majority of long-term costs will still have to be met from private sources.
The most popular type of annuity policy for the funding of long-term care fees is called an “immediate needs annuity”. This is a one-off premium into a specially underwritten annuity where monthly payments are made for the entire time that the person remains in care.
As the payments are made directly to the care provider, they can be paid gross without any tax deduction. The cost of this annuity will be far less than that of a conventional annuity.
It is hard to estimate the size of the long-term care immediate needs market but it is currently less than £100m of premiums a year but over £4bn is spent in the UK on care fees in nursing and residential homes. This sector of the market is growing rapidly and provides huge opportunities for professional advisers.
Medical conditions covered
To get an idea of the type of conditions that will qualify for the retirement annuities, you simply have to look at the leading causes of death in the UK for people over 50. They are heart disease, cancer, strokes and major organ failure. It is no surprise to learn that the majority of cases underwritten result from illnesses related to these conditions.
However, many other impairments may result in a reduced life expectancy, such as diabetes, and most illnesses where the life expectancy of the sufferer is definitely affected will be considered.
For the immediate needs annuities there is an assessment system that is based on medical information (impairments or illnesses) and the ability of the individual to perform certain activities of daily living.
Of the enquiries received so far by PAFS, 30 per cent had dementia, 18 per cent suffered a stroke, 25 per cent had bone or joint complications, 7 per cent suffered heart problems, 6 per cent had cancer and 5 per cent had multiple sclerosis. The rest of the enquiries related to other, less common ailments.
Opportunities for professional advisers
There are huge opportunities for IFAs both in pension annuities and LTC. An IFA's first duty must be to provide the best possible advice. Where the client is in poor health, this means an impaired life annuity must be considered.
Everybody who has to buy an annuity at retirement and who is in poor health should be given the opportunity to obtain an impaired life ann-uity quotation.
Many people retiring from company money-purchase schemes are not given this opportunity and those responsible for these schemes should improve the range of annuity options offered to their retiring members. A small amount of additional work by the administrators may result in a huge benefit for the annuitant.
If IFAs are to survive in a world where it is increasingly difficult to operate in their traditional markets and where increased competition and the high cost of compliance are eroding profit margins, they need to seek out other opportunities.
One of these could be the market for advice about the cost of long-term care. Stakeholder pensions may be bought with limited advice but advice, and plenty of it, will be an important feature of the LTC market for a long time to come.
IFAs can not only increase the income of their clients by recommending impaired life annuities but should also be able to identify other financial needs that are related to the health of their client.