Enhanced annuities have continued to steal the limelight, with sales in the first quarter of 2009 reaching £443 million, 9.3 per cent higher than the previous quarter, says Watson Wyatt.

Research by the consultant shows that the dramatic growth in the number of people opting for enhanced annuities, which provide bigger pensions for those with negative lifestyle factors or serious medical conditions, is likely to continue.

Andy Sanders, a senior consultant at Watson Wyatt, commented: "Taking the first quarter's sales on an annualised basis would imply sales of close to £1.8bn in 2009, up from the record sales in 2008 of £1.4bn.

"The conventional 'pooling of risk' approach to the annuity market is increasingly being challenged by the application of full or partial underwriting, whether based on health or on postcode as a proxy for expectations of longevity," Sanders said.

He added that these forms of segmentation are good news for consumers because they give people more options for maximising their retirement income. "However, it does mean a more complex environment for product providers to remain competitively priced and for advisers to identify the most appropriate product for their clients."

Watson Wyatt said the average enhanced annuity premium in 2008 was just over £52,000.

Craig Fazzini-Jones, director and head of MGM Advantage Designs for Retirement, commented on Watson Wyatt's findings saying that one of the positives that is pushing towards increased sales is the sophistication of providers. "Consumers can find a rate for just about any medical condition and can be confident they'll get a competitive quote if they search the open market.

"The industry is also benefiting from the standardisation of medical questions - a process that has led to a surge in IFA interest as fact-finding and quotations are so much easier to handle.

"But the only way we'll really expand the market and exploit the potential of enhanced life annuities is to raise consumer awareness of their retirement options if they are ill. The truth is people just don't know enough, particularly about what conditions qualify for an enhanced life annuity. Even people with light impairments like raised blood pressure or high cholesterol can qualify - a simple over-the-counter health check can reveal something that could lead you to a better deal in retirement."

- Pensions Age May 2009

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