"Impaired life" annuities set for robust growth

By Clara Ferreira-Marques

LONDON (Reuters) - With healthy pensioners living ever longer, at a cost to the annuity industry, providers of "impaired life" annuities to smokers and the sick are carving out a rewarding niche that looks set for heady growth.

With longevity rising, extended payouts to pensioners are already a major concern for UK insurers and investors, with Prudential (PRU.L), Aviva (AV.L) and Legal & General all taking heavy charges in 2007.

But others are finding profit in the changing landscape.

The market for enhanced annuities -- a higher income in retirement for those with an illness, job or lifestyle that could shorten their lives -- topped 1 billion pounds for the first time in 2007. That is up 35 percent on 2006 and more than double 2001 levels, according to consultants Watson Wyatt.

Industry observers say enhanced annuities, currently about 10 percent of the UK market, could grow to more than double or triple that, at a time of strong growth for all UK annuities. Savings are pouring into the annuity market as growing numbers of Britons approach retirement armed with cash pots from their defined contribution pensions.

"We believe, in the long run, that the potential is about 40 percent," said enhanced annuity veteran Mike Fuller, chief executive of specialist insurer Just Retirement JR.L.

"I am still of the view that a great deal more business should benefit from enhanced annuities than is currently taking place."

Unlike standard annuities, which offer a set amount of annual retirement income dependent on age or gender, enhanced annuities use more detailed information, from medical records to home address and job, to offer higher incomes for those expected to live for less long.