An enhanced or impaired life annuity is an annuity that provides a guaranteed income for the rest of your life. But it pays you a higher income because you have or have previously had certain medical conditions. You buy it with the money from your pension fund.

Many medical conditions may be covered including cancer, heart attack, stroke, asthma, high blood pressure and diabetes, as well as factors such as whether you’re a regular smoker or are overweight. Medical health questionnaires and possibly a report from your doctor may be required before an improved level of income can be offered on your annuity. Once the annuity is set up it won't change, even if your health improves, so it's well worth looking into.

Your dependant’s health can also be taken into account if you want your annuity to include them too.

Pros

• The extra income from the higher annuity rates offered is for life, even if your health improves.
• Even if you’re fine, but your dependant has a health condition, you could still get an enhanced annuity.
• Enhanced annuities promise to pay you a regular income for life.
• You can customise your annuity to suit you:
• You can arrange for your dependant to receive an income after you die. This income will be based on the enhanced rate regardless of their own health.
• You can choose to protect your income against inflation.
• You can choose to have an income that stays the same, or one that starts at a lower amount but increases each year.
• You can choose for some of the money you invested to be paid back to your estate if you die within a set period of time.

Cons

• Your annuity is for life. Once you’ve bought it - you can’t cash it in, swap it for something else or alter your annuity options.
• You could die before getting your money’s worth from your annuity.
• You don’t have the flexibility to control the level of income you receive once it’s started.
• Unless you choose otherwise, your dependants will not be automatically protected.
• Unless you choose otherwise, your income is not automatically protected against the effects of inflation.

If you are nearing 50 and considering retirement, have a pension fund, and you have (or have previously had) a medical condition, you smoke regularly or are overweight, you could benefit from the higher income offered from an enhanced annuity.

You can buy an annuity from an insurance company or through a financial adviser.

Whilst your pension provider may offer an enhanced annuity, it may not necessarily pay you the best income. Different insurance companies offer different rates on their annuities, which can make a huge difference to the income you will actually receive. So you should shop around to make sure you get the best rate. For improved rates a medical questionnaire may be required.

If you need more help choosing your annuity you could speak to your pension provider or an insurance company who may refer you to their advisers. You need to remember not all providers offer advice and if they do, they may only be able to give information on their own products. If you want advice about the whole of the market, you’ll need to speak to an independent financial adviser.

Do your research - decide whether an annuity is right for you by looking at all the available options for funding your retirement and considering the pros and cons of each.
 
Shop around - you could get more for your money by shopping around for the best deal on the annuity market.

Start early - take your time to consider the options available on an annuity, choosing those that best suit your immediate and long-term needs. Annuity rates can change, if you buy now you may get a better rate than if you waited. However this could work the other way around as well, you may get a better rate by waiting. Remember, once you buy an annuity, you are locked in and it cannot be changed.

Don’t forget - you can normally take up to a quarter of your pension fund as a completely tax-free cash lump sum. Tax rules may change in the future.

Check out and compare - there are a range of annuities and options. Whatever your circumstances or your health, you can find the one which best suits you.

Remember you’re in control - you have the final decision on all the choices you make.

Don’t be afraid to ask - if you have any questions about annuities generally or about a specific product, make sure you get advice before making a decision.