Enhanced annuities are becoming more popular, with £1.26 billion of the products sold during the first half of the year. 

Also known as impaired life annuities, enhanced annuities provide a larger income in retirement for people with serious medical conditions or lifestyle factors such as obesity or smoking, as they are likely to have a shorter life expectancy than healthier people.

The value of enhanced annuity sales in the UK increased 41 per cent in the first half of 2010 compared to the second half of 2009, according to research by Towers Watson.

New records for sales were set at £582 million and £676 million in the first and second quarters of 2010 respectively.

Andy Sanders, senior consultant at Towers Watson, says: ‘2010 looks set to be another record year for enhanced annuity sales, with every prospect of breaking the £2.5 billion threshold for the full year. This means more consumers are benefiting from higher pension incomes because their medical condition or lifestyle has been assessed and a lower-than-average expectation of life anticipated.’

Enhanced annuities make up over a third of all annuities sold in the open market in the UK. Just Retirement is the largest provider of enhanced annuities, and CEO Rodney Cook believes that 40 per cent of retirees could qualify for the products.

People approaching retirement are normally offered an annuity from their pension provider. But consumers should refrain from accepting the annuity before looking at what other providers offer – this is known as using the ‘open market option’.

George Ladds, head of investment and pension research at Fair Investment Company, says annuity rates have fallen to an all-time low and so it is essential to use the open market option to get the best rate, and therefore the highest income during retirement.

‘Unfortunately, as we live longer, annuity rates are going to go down and pensioners have to accept that. But what they don't have to accept is the quote being offered to them by their provider, because more often than not, it will be beaten by another provider,’ he says.

Mark Hoban, the financial secretary to the Treasury, said last week that he wanted more people to use the open market option and would look at how the pension industry is encouraging people to look for the best annuity rates.