Annuity sales set to hit new record

Enhanced annuity sales is set to hit new record

Sales of annuities that reflect people's health or lifestyle are expected to reach a new record this year, a consultancy firm has said.

The total value of enhanced life annuities sold during the first quarter of the year rose by 9.3% to £443 million, according to Watson Wyatt.

The group said this level of sales suggested the market for enhanced annuities would be worth £1.8 billion during the whole of 2009, beating record sales of £1.4 billion in 2008.

Annuities are bought by people with personal or defined contribution pensions, to convert their pension pot into a retirement income.

But unlike conventional annuities, under which an individual's life expectancy is based only on their sex, enhanced annuities take other factors into account, such as whether the person smokes, has serious medical conditions, is overweight and even what their occupation was or which area of the country they live in.

Because the annuities take into account negative factors that could reduce people's life expectancy, they pay higher rates than standard annuities.

The products were first introduced in the UK in 1995 and they rapidly gained a substantial market share.

They now account for around a quarter of all annuities sold to people who shop around and this proportion is expected to continue to increase.

Sales of the product, which is also known as an impaired life annuity, have soared from £419.6 million in 2001 to £1.4 billion last year.

Annuity rates have been hit hard by the Bank of England's decision to embark on quantitative easing, which has reduced gilt yields, upon which annuity rates are partially based.