SCOTLAND has the lowest life expectancy in the UK, which means thousands are being cheated out of valuable cash in retirement because they have traditionally subsidised the more health-conscious in other regions.

However, those days have gone. It is now possible to more than double your pension at retirement by asking for the state of your health to be taken into consideration. Yet how to do so remains one of the best-kept secrets in the financial arena.

A new breed of annuities, which bases your pension on your individual medical record, has developed fast in recent years. These are called 'enhanced' or 'impaired life' annuities. Unlike most kinds of insurance, the company actually rewards customers for poor health and bad behaviour by paying them bigger pensions.

As Scottish Widows' head of annuities Peter Glancy put it: "We are simply trying to identify the customers with below-average life expectancy, and to make sure they receive fair value for their pension savings, by paying them more while they are alive."

Matt Trott, a spokesman for Tomorrow, one of the leaders in the field, added: "These annuities are even more valuable to Scots than to those living elsewhere in the UK, because we know the country suffers from serious health issues related to obesity and smoking. Lower life expectancy means that many should gain."

Hundreds of thousands of workers are forced to convert their pension pot into an annuity each year, unless their employer already guarantees them a pension linked to their final salary.

Specialist advisers and insurers will this week claim these retirees are being short-changed by between £40m and £60m a year, because only around one in 10 who could qualify for an enhanced or impaired life annuity is actually buying one. Over the course of a typical retirement they are collectively missing out to the tune of up to £1bn.

Research from Tomorrow (formerly GE Life) reveals that 40% of the 354,875 who buy an annuity each year could qualify for a poor health enhancement, yet fewer than 20,000 do so.

Customers who suffer from high blood pressure or cholesterol, who smoke or have a high body mass index (are overweight) could enjoy up to 25% extra through an enhanced annuity.

But if they have suffered from more serious illnesses, such as heart disease, cancer or multiple sclerosis, their income in retirement could more than double if they take out an impaired life annuity.

Jaw-droppingly, six out of 10 policyholders still do not shop around when their pension matures, but simply accept the annuity quotation which their existing company offers, according to data from the Association of British Insurers.

Stuart Bayliss, pensions expert at Annuity Direct, said: "This is complete madness. Buying an annuity will dictate a person's income and therefore lifestyle for decades. Yet most people just accept the first offer they get."

Even those who do shop around are often oblivious to the existence of these specialist health policies and only a small fraction will ask for enhanced terms. If they did, Tomorrow's research concluded, they would receive 20% more on average, which the company says would boost a typical pension pot of £25,597 by £334 annually.

However, Annuity Direct says these figures are too conservative. Bayliss said: "Tomorrow's findings are based on raw numbers. We sex-adjust on the grounds that men have much bigger pension pots, and typically win far more through an enhanced annuity."

Whatever the potential gains, everyone agrees they are big. Enhanced or impaired annuities are a relatively new concept, with the first launched little more than 20 years ago. At first the market grew very slowly, with contracts offered by only a very limited number of specialist companies, such as Just Retirement, Partnership Assurance and Tomorrow, which were not household names.

So the market is likely to continue to grow and become more competitive still. As one spokesman argued: "Companies can never afford to let all their best risks go off to competitors. With annuities, their best risks are the ones who die first. No insurer can afford to be left paying annuities only to those who look set to live to a very ripe old age."

As a general rule, enhanced annuities cover what are considered minor conditions such as smoking, diabetes, high blood pressure and cholesterol and being overweight. Applications are rated automatically according to a points score card, and the more boxes you tick, the more pension you will be paid.

Smokers, for example, might receive 7% to 8% more from an enhanced annuity than they would from a standard contract. If they are also a diabetic, this could swell to 12%, and higher if they are overweight and have high cholesterol.

However, if they have a history of more serious and complex health problems, such as heart disease, cancer, dementia, Parkinson's, motor neurone disease and so forth, the company will ask for a doctor's report.

These customers are then underwritten individually, based on the GP's report. As companies can take a completely different view of the various risks, retirees are strongly advised to always get quotes from every company which would offer them an annuity.

To help them do this, some independent financial advisers, including Origen, Bank of Scotland Annuity Service, Hargreaves Lansdown, William Burrows Annuities, Annuity Direct and the Annuity Bureau specialise in this area.

Origen's head of retirement services, Nick Flynn, said: "It is vital customers approach every company who might conceivably sell them an annuity to be sure of getting the best deal."

For example, one Origen customer with a £206,000 pension fund was offered an annual income of £18,020 from his own company. When quotes were sought from the impaired specialists because of a history of heart disease, Norwich Union nearly doubled this, offering £34,296. Six other impaired specialists offered between £22,689 (Tomorrow) and £20,410 (Legal & General).

However, it is not all good news, as PricewaterhouseCoopers pensions partner Peter Tompkins pointed out: "Yes, those with a poor health record can get more, but the money has to come from somewhere, and it may ultimately mean that those in good health will get less."

Even if you are in good health, it may be possible to boost the pension if your spouse is less than pucker. Where a couple are applying for a joint-life annuity, the health of the second named will be taken into consideration.

He said: "The same insurer may offer widely varying quotes depending on whether you want single, joint life, level, escalating or whether you want the income guaranteed for a certain length of time.

"Where health is an issue, it can make sense to guarantee the annuity will be paid out for five or 10 years. This can be arranged surprisingly cheaply."

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