Too good to be true?

(Feb 22, 2011)

People in poor health don't live as long as their healthier colleagues. This obvious fact underpins the existence of the enhanced annuity market in the United Kingdom. Retirees who can demonstrate a health problem can often get a higher pension at retirement by going to a specialist annuity provider.

The same phenomenon works in reverse - for a given size of pension, the cost of providing it would be lower for those in poor health.  A recent article described how this could supposedly be used to the advantage of an employer with a defined-benefit pension scheme.  Under certain circumstances, the cost of buying out an ill-health retiree's benefits can be less than the notional reserve held for those benefits.

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Tags: selection, enhanced annuities

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