Heaven can wait, but can your pension?

As life expectancy increases so does the danger of outliving your income. Pamela Atherton reports

If you are just 35 as we hit the millennium, you can expect to live to see the new year celebrations in 2050.

New figures from the Faculty and Institute of Actuaries show that the average 35-year-old insured man can expect to live five years longer than was previously thought - until the age of 85 and one month. A woman of 35 can expect to live to be 88.

It is good news for those who love life, but living far longer means your money will have to stretch much further in retirement, especially when you may need to pay for extra care at home or go into a residential home .

At the moment most people retire and use the bulk of the cash they have built up in pension schemes to buy an annuity contract - an income for the rest of their lives. This comes from an insurance company. Because older people need security, the insurers fund annuity contacts by buying government bonds, the safest form of investment.

But falling interest rates mean that the interest paid on 15-year gilts has fallen in value from 12.36 per cent in 1990 to 5.11 per cent today.

The effect on pensioners' incomes is such that someone buying an annuity today will receive roughly half what they would have got in 1990.

For instance, a man of 65 with a pounds 100,000 pension fund buying a joint life annuity for himself and his 63-year-old wife would receive approximately pounds 626 a month today, compared with pounds 1,242 a month in 1990.

If you are a member of an occupational pension scheme, you do not have to worry about this. The trustees of your scheme should see to it that you get the best rate available to you in the market.

An insurance company decides how much it is willing to pay you each month based on a number of factors such as your age, sex, health, lifestyle, occupation and where you live, because it is making a bet as to how long you are likely to live.

Clearly, the older you are when you purchase an annuity, the higher the annuity payments, because the length of time the insurance company will have to pay you has fallen.

Men still have a shorter life expectancy than women so they get more cash from annuities - a 60-year-old male can expect to live to be 83 years and nine months old, compared with 86 years and 10 months for women.

While those who are healthy and relatively wealthy may face a tough time in retirement, there are compensations for those who don't fit the mould.

If you are in poor health or are a smoker your life expectancy is likely to be shorter.

MGM Assurance is the first insurer to target those who have worked in manual occupations all their lives and who live in the north of the UK (which is defined as north of a line drawn between Bristol and the Wash). To be eligible for one of these super-annuities, you have to meet both the occupational and geographical criteria.

If you live in the south and have an office job, there are a range of other enhanced annuities it is worth knowing about:

n Impaired life annuities: for individuals who are suffering from a life- threatening medical condition such as certain types of cancer and heart disease, Parkinson's disease, multiple sclerosis, certain forms of diabetes and high blood pressure. This list is not comprehensive as each case is considered on its own merits.

Impaired life annuities are offered by the Guaranteed Underwriting Agency, Pension Annuity Friendly Society, AXA Sun Life, Scottish Widows and Stalwart Assurance.

n Smokers' annuities: offered by Stalwart Assurance to those who have smoked an average of 10 cigarettes or more (but not cigars) a day for the last 10 years.

n Stalwart also offers annuities for the seriously obese. If you are overweight, but not obese, and have a serious medical condition, you may qualify for an impaired life annuity from one of the providers listed above.

Nigel Parry, of the Pension Annuity Friendly Society, says there is no standard list of medical conditions that are covered. "The test is whether the individual's normal life expectancy is definitely reduced by their condition.

"Common illnesses that we accept are angina, bronchitis and diabetes of long standing. In some cases, we have accepted hypertension.

"It all depends on the degree of disability that the individual is suffering."

There is also good news if you don't smoke yourself, but are married to a smoker. Stalwart Assurance will enhance the payments made on a joint life annuity purchased by a non smoking male whose wife smokes, to reflect her reduced life expectancy.

n The Annuity Bureau has produced a free guide called `You and Your Annuity'. Call 0171-620 4090 for a copy.