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Sales were up by 35 per cent from 2006 and have increased by 161 per cent since 2001.

Watson Wyatt says that the dramatic growth in the number of people taking out enhanced annuities – which provide bigger pensions for those with serious medical conditions or with negative lifestyle factors such as weight, smoking, occupation or geographical location – is set to continue.

The firm believes up to 40 per cent of people taking out an annuity may be entitled to enhanced rates.

Enhanced annuities, often known as impaired life annuities, make up over 20 per cent of all annuities sold in the open market in the UK.

Watson Wyatt said this is having an increasing effect on the standard annuity providers who are left with the healthier lives.

Combined with the impact of improved longevity, the growth of the enhanced annuity market is increasing the downward pressure on annuities rates for healthy people. It is also putting pressure on standard annuity providers' margins.

"There are currently eight enhanced annuity providers in the UK with at least three more new entrants expected in 2008," said Mark Joannes, a senior consultant at Watson Wyatt.

He added that the impact on standard annuities may force more standard annuity providers to enter the enhanced annuity market as a defensive measure.

Enhanced or impaired life annuities were first introduced in the UK in 1995 and have rapidly gained a substantial market share of all annuities sold.

They include annuities enhanced for serious medical conditions, annuities for smokers and annuities enhanced as a result of lifestyle factors such as weight, occupation or geographical location.

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Related links 

• Watson Wyatt