What Is A Medically Enhanced Annuity?

If you’re approaching retirement and have a health condition or certain lifestyle factors, you may be entitled to a higher income than standard annuity rates would offer. An enhanced annuity, also known as an impaired life annuity, uses personal health and lifestyle information to provide a potentially significant boost to your retirement income.

This guide explains how enhanced annuities work, who might qualify, and how to assess whether this type of annuity could make a meaningful difference to your financial future.

What Is an Enhanced Annuity?

An enhanced annuity is a type of lifetime annuity that converts your defined contribution pension pot into a guaranteed, regular income for life—just like a conventional annuity. The difference lies in how your income is calculated.

Unlike standard annuities, enhanced annuities take into account your medical history, current health conditions, and certain lifestyle factors that may reduce your life expectancy. As a result, the provider may offer a higher level of income, on the assumption that payments will be made for a shorter period.

This isn’t about prediction—it’s about probability. Providers base their rates on averages across large groups of people. Even if you qualify for enhanced terms, it’s still entirely possible that you’ll live a long and healthy retirement.

Who Is Likely to Qualify?

A wide range of medical conditions and lifestyle circumstances can make someone eligible for enhanced terms. These include common issues such as high blood pressure, raised cholesterol, diabetes, and respiratory problems, as well as more serious conditions like cancer or heart disease.

You may also qualify based on lifestyle factors, even if you don’t currently have a diagnosed condition. For example, regular smoking, a high BMI, or a history of alcohol consumption are all considered. In some cases, your postcode may also be relevant, as average life expectancy can vary by region.

The key point is this: you don’t need to be seriously ill to be eligible. Many people qualify simply by providing accurate and complete information about their health and lifestyle history.

Am I Required to Buy an Annuity from My Pension Provider?

No. When you reach retirement age, your existing pension provider may offer you an annuity quote—but you’re under no obligation to accept it.

In fact, remaining with the default provider can result in a significantly lower income, particularly if they do not take your health into account. Some providers don’t offer enhanced annuities at all. By shopping around and comparing quotes, especially from specialists in enhanced terms, you may secure a much higher retirement income.

The Financial Conduct Authority has previously reported that a substantial majority of people who purchased an annuity through their pension provider could have received a better deal elsewhere. That remains relevant today.

How Much More Income Could I Receive?

The level of uplift you may receive depends on several factors, including the severity and nature of your medical condition, any lifestyle disclosures, and your age when taking out the annuity.

In some cases, individuals with multiple or serious health conditions have received up to 75% more income than they would have under a conventional lifetime annuity.

To illustrate, Margaret, aged 68, disclosed a history of Type 2 diabetes and high blood pressure. She was able to secure a retirement income 52% higher than her original standard annuity quote. The size of her pension pot didn’t change—just the provider’s assumptions about how long it might need to last.

Other influencing factors include the current annuity rates available when you apply, and the overall size of your pension fund.

Will I Need to Have a Medical?

In most instances, no.

Enhanced annuity providers typically assess your eligibility using a health and lifestyle questionnaire. This may ask about past or current conditions, medications, smoking or alcohol habits, and your weight and height. Where necessary, they may request access to your medical records. A physical medical examination is rare and only used in complex situations.

To maximise your income, it’s important to be thorough and honest in your disclosures. Even conditions you might consider minor could have a meaningful impact on the rate you’re offered.

What Happens to My Annuity When I Die?

Enhanced annuities can include death benefit options to support your loved ones after your death. These features must be selected at the outset, and they will reduce your personal income slightly, as the provider is committing to potentially pay out for longer.

The main options include:

• Joint-life annuity – Income continues to be paid to a financial dependant, such as a spouse or partner, for the rest of their life. This can be set at full or reduced levels, depending on your preferences.
• Guarantee period – The annuity will continue to pay an income for a minimum term, even if you pass away before that period ends. For example, with a ten-year guarantee, your nominated beneficiary would receive the income for the remainder of that term.
• Value protection – A lump sum is paid to your beneficiary based on any remaining value of your original pension pot, minus income already paid.

These options can provide reassurance that your pension fund will continue to benefit someone you care about, even if you die earlier than expected.

How Will the Income Be Taxed?

You can usually take up to 25% of your pension pot as a tax-free lump sum when setting up the annuity. After that, all annuity income will be treated as taxable income under standard UK income tax rules.

If you die before the age of 75, any death benefits—such as ongoing income or a lump sum—are usually paid to your beneficiary tax-free. If you die at 75 or over, these payments will be taxed at the recipient’s income tax rate.

What Are the Benefits and Risks?

Like any financial product, enhanced annuities come with both advantages and limitations.

Benefits

• Provides a guaranteed income for life, which can help with budgeting and peace of mind.
• Higher income if you qualify due to health or lifestyle conditions.
• No exposure to investment risk or market fluctuations.
• Can be structured to provide for a spouse or other financial dependent after your death.

Risks

• If you select a level annuity, inflation may erode its value over time. Escalating annuities can mitigate this but start at a lower initial income.
• No flexibility once the annuity is set up—it cannot be changed or reversed.
• If no death benefits are included, income payments stop on your death.

Final Thoughts

An enhanced annuity could allow you to turn your pension savings into a substantially higher lifetime income, simply by factoring in your health and lifestyle. But the key is to make sure you’re assessed properly and given the opportunity to explore offers from specialist providers.

Before you decide, it’s wise to seek expert guidance and compare your options thoroughly. This can help ensure your pension fund works as hard as possible for you—and potentially for your loved ones, too.