UK - A 35% increase in the sale of enhanced annuities in 2007 could force more standard annuity providers to enter the enhanced market as a "defensive measure", Watson Wyatt has revealed.

Research by the consulting firm revealed sales of enhanced annuities - which provide larger pensions for people with serious medical conditions or negative lifestyle factors such as smoking - exceeded the £1bn (€1.4bn) barrier for the first time last year.

Watson Wyatt noted sales in the sector have increased 161% since 2001, but it claimed the number of people choosing enhanced annuities is set to grow, as it believes up to 40% of people taking out an annuity could be entitled to enhanced rates.

Enhanced annuities, or impaired life annuities, currently represent more than 20% of all annuities sold in the open market in the UK, which Watson Wyatt claimed is having an increasing effect on the standard annuity providers who are left with the healthier pensioners.

The consulting firm warned the growth of the enhanced annuity market, combined with the impact of improved longevity, is increasing the downward pressure on annuities rates for healthy people and putting pressure on the standard annuity providers' margins.

Watson Wyatt pointed out there are just eight enhanced annuity providers in the UK at present, including Scottish Widows, Prudential and Norwich Union, although at least three more new entrants are expected within the next year.

Mark Joannes, a senior consultant at Watson Wyatt, warned: "The impact on standard annuities may force more standard annuity providers to enter the enhanced annuity market as a defensive measure."

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