An Enhanced Annuity pays a higher income in retirement if you have a medical condition that may reduce your life expectancy.

This is because an annuity is, in essence, a ‘bet’ with the annuity provider about how long you will live.

How does it work?

When you invest in an annuity, the provider converts your pension ‘pot’ (the total amount you’ve accumulated within your pension) into income payments, which are paid for the remainder of your life.

If you die before your predicted life expectancy, the insurance company will make a profit, which is used to pay the incomes of those who live longer than predicted. If you live longer than your predicted life expectancy, you will have won the 'bet' with the insurance company – and received a higher pension than you would have otherwise received.

The benefits

The amount of extra income you could earn in retirement depends on your actual state of health, or your lifestyle. If you have high blood pressure or high cholesterol, you could receive around 7% more income than from a ‘conventional’ annuity.

If you are a smoker, you may get up to 16% more income. If you are very seriously ill, the extra income will be significantly higher.

These significant differences highlight the importance of getting good quality advice before you take out an annuity.