The easy way to increase your pension income by 24%

Choosing a competitive annuity is a crucial decision. Get it right and you could enjoy a far greater income in retirement.

As a solution for providing us with an income in retirement, lifetime annuities are far from perfect. Annuties convert your pension income into a guaranteed income for the rest of your life. But annuity rates - which determine how high your income will be - have crumbled in recent years and the prospects for a reversing trend don't look good. But the fact remains for the vast majority of you, an annuity is still the best option for taking pension benefits.

So, it pays to know how to make the most of your annuity. I want to explain in more detail how you could be eligible for what's known as an enhanced annuity and what this could mean for your retirement income.

This is vital since an enhanced annuity can be significantly more generous than a standard annuity. But the trouble is very few people have actually heard of them, or know how they work.

According to retirement income specialist, MGM Advantage more than three quarters (77%) of British people aged 55 and over have no idea how an enhanced annuity could help them. This is really worrying since 59% could be eligible for the higher income they provide.

The company estimates that enhanced annuities pay out an extra 24% on average for men, and almost 23% more for women. So, if you're still clueless about enhanced annuities, it's time you found out.

What exactly is an enhanced annuity?

Enhanced annuities provide you with a higher level of income in retirement if your life expectancy is deemed to be below average. Annuities are often criticised for providing poor value for individuals who don't survive to reach average life expectancy. Usually, if you only live for a few years after intially purchasing the annuity, the lion's share of your original pension fund will be lost.

But precisely because there's a higher probability you won't live to average life expectancy, some annuities companies will pay higher rates to reflect the lower risk you represent to them. And you don't necessarily need to be in a poor health to be eligible for better rates either. People who smoke or who are overweight, for example, could also benefit from the increased annuity these products offer. In fact, you may be eligible for a special smoker annuity which is specifically designed for people who use tobacco products.

Here are some examples of medical conditions which could qualify you for an enhanced annuity, along with the percentage of people aged 55 and over who have suffered from one of these conditions:

Medical conditions which could lead to a higher pension income

Source: MGM Advantage, June 2010

If you suffer from high blood pressure, for example, you should obtain quotes from annuity companies which offer enhanced annuities to find out whether you're eligible for better rates. You'll most likely be pleasantly surprised by the results compared with the income you could get from a standard annuity for a healthy person.

If you suffer from a very serious medical condition, you could benefit from what's known as an impaired life annuity. This type of annuity could offer you a considerably higher annuity income if your life expectancy is significantly reduced as a result. In some cases, if may be possible to get an income which is 40% higher than you would get from a standard annuity.

Here are some examples of medical conditions which could qualify you for an impaired life annuity:

• Chronic heart disease
• Chronic lung disease
• Some primary malignant cancers
• Secondary malignant cancers
• Motor Neurone Disease
• Parkinson's Disease
• Hodgkin's Disease
• Alzheimer's Disease

Research by the Office for National Statistics (ONS) revealed that, in 2006, healthy life expectancy was 68.5 years for men and 70.5 years for women. Therefore, if you can delay purchasing your annuity until these ages, then there is a greater chance you will qualify for an enhanced or impaired life annuity. So by putting off your annuity purchase until you reach 70 or 75, you could receive an increase of almost 25% on standard rates as the MGM Advantage research shows.

I know here at lovemoney.com we continually harp on about shopping around for a better deal but there really is an excellent reason for that. With many pensioners struggling in retirement, making the most of your pension fund is essential and I think it would be foolish not check out whether you could get an enhancement to your annuity income. If your health has deteriorated far enough to make you eligible for impaired life rates then your income could be even greater.

Remember once you've committed to an annuity there's no going back, so the decision you make will affect the rest of your life.  

More: Great news for your pension | How to buy the right annuity