It seems that people approaching retirement are starting to become more savvy about the routes available to boost their retirement income. Sales of enhanced or impaired life annuities rose by 24 per cent over 2009 alone, according to research by consultancy Towers Watson, and now account for 17 per cent of the total annuity market.
That's more than double their share in 2001, when the firm began tracking their progress.
"People are getting the message that anyone with any sort of health problem needs to apply for an enhanced annuity," says Billy Burrows, managing director of William Burrows Annuities.
Enhanced annuities pay a higher annual income than ordinary level annuities for those with medical conditions or negative lifestyle factors (such as smoking or obesity) that are likely to affect their life expectancy.
And Nigel Callaghan, annuities expert at Hargreaves Lansdown, claims that many more people could be benefiting from such an uplift to their annuity income. "The market says that around four out of 10 retirees should be eligible for an enhanced annuity, so we're still a long way off at 17 per cent," he comments.
Mr Callaghan acknowledges that enhanced annuities are being sought out by the growing number of new retirees who shop around for the best deal in the open market, with over a quarter of open market annuities now being enhanced products. However, he is concerned that the forward-thinking individuals who bother going to the open market to find their annuity deal are still in a minority.
Around 60 per cent of new annuitants don't want the extra effort involved, or simply don't understand its significance, he says. Instead they flop straight into the annuity offered by their pension fund provider, who may or may not offer an enhanced alternative, but doesn't need to worry about offering competitive rates either way. "Just 0.5 per cent of investors staying with their own pension provider bought enhanced annuities last year," Mr Callaghan adds.
But insurance companies are coming under pressure to make enhanced rates more widely available to existing customers. "We are keen to lead providers to offer enhanced rates to all customers who are entitled, and are the first pension provider to include a medical questionnaire in our pension packs. This means all customers who normally take quotes offered will get the income they should receive," claims Darren Dicks, head of at retirement at Aviva Life and Pensions.
So how do enhanced annuities work, what kind of conditions may qualify, and how much difference could they make to your annual income?
In effect, an enhanced annuity is like a conventional annuity, but individually tailored to factor in the impact of your health and lifestyle on the number of years your pension pot is likely to have to provide you with an income. The lower your life expectancy, the higher the annual payout over your expected remaining lifetime. If you're lucky, you may end up living much longer than the actuaries anticipate, despite your ailments, but life expectancies and therefore annuity rates are based on statistical distributions.
According to annuity provider MGM Advantage, the enhancement paid by these bespoke products averages around 22 per cent more than the average standard annuity.
More than 1,500 medical conditions, alone or in combination, could qualify for an enhanced annuity – and the number continues to rise. Billy Burrows defines three broad categories of "impairment", though in reality it's very much of a spectrum.
Eat, drink, be merry
At the lower end are the 'lifestyle' annuities, taking into account factors like smoking, high alcohol consumption, obesity, high cholesterol, high blood pressure or diabetes. These may not be significantly affecting your quality of life, but could nonetheless boost your annual income by around 12 per cent on average.
Above them are enhanced annuities, for those whose health is impacted by conditions such as mild angina, bowel complaints, multiple sclerosis or chronic asthma; they may provide an enhancement of around 18 per cent on average. Finally, impaired annuities paying an uplift averaging 35 per cent above standard rates may be paid to those suffering more serious chronic conditions such as heart disease, kidney disease requiring dialysis, or malignant cancers.
"Precise levels of enhancement can depend on the severity of the condition, the time since diagnosis and the level of medication prescribed," adds Nigel Barlow, head of research at specialist adviser Just Retirement.
Shopping around
What should you do if you're approaching retirement and think you might qualify for an enhanced annuity? First, it's worth doing some homework online, using one of the various sites available for a direct quote. Billy Burrows recommends the search tool at www.sharingpensions.co.uk as a good place to start.
But this is a situation where, given the number of factors involved and the lifetime significance of the sums at stake, it really does make sense to speak to a specialist adviser. "You are more likely to get the best deal if you see an annuity specialist, because they will know the market and which insurers are specialists in particular medical conditions," comments Mr Callaghan.
"It's also relatively straightforward now, because instead of having to fill in a separate medical details form for each annuity provider, IFAs now use a single common form which all the insurers will accept," adds Burrows.
Aston Goodey, director of sales and marketing at MGM Advantage, observes that in any case there is no financial advantage to consumers if they buy their annuity direct from an annuity provider, rather than going through a specialist intermediary. "When a sale is made direct to an individual consumer, the insurance company simply holds on to the commission it would otherwise have paid to an adviser. If they didn't, advisers would lose out, because canny investors would take advice but then buy more cheaply direct from the provider," he explains.
That, of course, will change from 2012, as changing legislation means IFAs have to work on a fee basis, rather than receiving commission from providers. Nonetheless, if the price of ensuring a higher income for the rest of your lifetime is a one-off payment to an annuities adviser, most people would consider it money very well spent.
