ANYONE with a history of cancer, heart problems, kidney disease, or many other medical conditions is only too familiar with the fact that they will have to pay more for life insurance. For some, their illness will be too serious or advanced to secure any cover at all.

Yet the same person, who at retirement goes looking to purchase a pension annuity with the proceeds of their pension fund, will find that the state of their health is of no interest to the same insurance company. Where they once paid above the market norm for one life product because there was a higher risk that they would die sooner, they are now treated just like any other healthy person, with an average expected life span. Instead of being offered an enhanced annuity which will provide a higher pension income, they are offered the same income as a retiree with many years left to live.

In the past fortnight the Norwich Union has introduced what is known as an "impaired life" pension annuity, which will address this costly anomoly. The Norwich is the first company to bring out such a product for both employees of company pension plans and self-employed people with personal pension plans, and it should have a significant financial impact for anyone with a life-threatening illness. These include cancer, chronic heart disease, congestive heart failure, heart attack, stroke, severe hypertension, liver, kidney or respiratory failure among others.

Typical examples provided by the company show that a man, aged 60 with heart disease could expect a nearly 40 per cent increase in the value of the annuity he could purchase from the Norwich; the same man suffering from cancer could receive an annuity worth 93 per cent more than usual. The enhanced annuities offered to women suffering from life threatening conditions are even higher.

"This product addresses an issue which has been contentious in the industry for a long time now. People whose life expectancy is less than normal should receive larger pensions as a result," says Mr David Overy, Norwich Union's pension development manager.

You do not need to be a Norwich pension customer to buy this annuity, and the product has been widely welcomed in the market. Brokers, who regularly shop around for the best annuity rates for their retiring clients, say this development is long overdue here - it has been available in Britain for some years - and that it may very well be adopted by other pension annuity providers, of which there are only about a half dozen in the Irish market.

"In the annuity market up to now there were no questions asked about a retirees health, they just wanted to know the person's age and sex," explains Paul Kenny of Irish Pensions Trust, one of the State's biggest pension fund administrators and trustees.

"This move is particularly significant.

With interest rates so low these days, it is particularly important to try and get the best annuity rate possible for any client," says Mr Kenny. "But the fact that it is also an open market option is also very good news for pension trustees like ourselves who are often in the position of having to wind up an occupational pension plan and need to buy annuities for existing pensioners, who may very well now have one of the medical conditions listed by the Norwich," explains Mr Kenny.

The importance of shopping around for the best pension annuity on the market cannot be stressed enough say advisers. Annuity rates can vary from week to week - they are mainly linked to guaranteed investments like government gilts, though there is increasing interest in unique annuity investment options like Equitable Life's With Profit Annuity. Different companies will offer different rates.

The Irish Pensions Trust weekly annuity table for the week ended March 18th shows just how variable rates between companies can be: as the table shows, a £50,000 pension fund can buy an annual annuity - or pension income - ranging from as high as £4,978 a year for a man aged 65 from the Friends Provident to as low as £4,487 from Hibernian Life.

For women the same age, the highest value annuity - £4,536 - will be paid by Irish Life, while the lowest - £3,892 - is offered once again by Hibernian. (Women are always quoted lower annuity rates than men, though interestingly, Norwich Union's impaired life pension annuity pays significantly higher rates to women suffering from life threatening illnesses than to men.)

Brokers, who earn commissions of 2 per cent of the purchase price for arranging annuity purchases, believe that many retirees are unfamiliar with the open market clauses attached to their pension contracts and too often take - to their detriment - the annuity offered by their pension provider.

Many brokers support the view that open market searches be made compulsory for all pension trustees. (They are already obliged to take the best advice.) Last year, the British pensions watchdog, OPAS, took action against the trustees of an occupational defined contribution plan for not seeking the open market option for a man who was retiring. As a result of OPAS's actions he eventually secured, a pension worth another £1,000 a year.

"When you buy an annuity, the decision is irreversible," says Paul Kenny, "and this is why it is so important to get it right". But it is not only the value of the annuity that counts, but also the type of annuity you choose. Should it be indexed? Do you need to provide a pension for spouse and dependents? Are you better off taking a lower-value pension to begin with and escalate its value as your retirement progresses?

Another interesting option on the Irish market is Equitable Life's with-profits annuity. Conventional annuities are calculated by reference to the person's sex and life expectancy and the return achieved from the decreasing capital base from the yield on a basket of government gilts at the date of purchase.

The Equitable Life calculation takes into account the age and sex of the client, but instead of an all-gilts basket, the decreasing capital is based on bonus rates of the company's with-profits (gross) pension fund.

According to Equitable Life, the with-profits annuity invests in a well-managed fund that is exposed to both gilts and equities, a fund that has typically outperformed a straightforward, fixed-interest investment like gilts.

The fund allows for a reasonable assumption of future bonus rates at the beginning of the annuity though this rate cannot initially be set higher than 6 per cent. Typically, the person chooses a bonus rate in 0.5 per cent increments up to the maximum 6 per cent to suit their income needs.

For most people who adopt this type of annuity, they choose a lower starting income from the with-profits annuity fund, which rises each year as the fund value grows and the bonuses are applied. Compared to conventional annuity funds, it performs very well indeed.

For example, a 60-year-old man retiring with a £100,000 pension fund could expect to buy a conventional, indexed pension that produces £564 per month income in year one, £654 a month by year five, £758 by year 10, £879 per month by year 15 and £1,019 a month after 20 years. In comparison, the with-profit annuity, with a 3 per cent assumption would produce a minimum guarantee of £570 a month for the first year and then 3 per cent less every year there after, decreasing to as little as £315 per month by year 20 but this is assuming that there is no future fund growth or with-profit bonuses, something that has never happened.

If the equitable declared bonus of just 3 per cent (last year's bonus was 12 per cent) the initial monthly income of £570 will remain the same for the entire retirement period.

A 9 per cent annual growth rate (the minimum allowed by the IIF for illustration), which would result in bonuses far in excess of 3 per cent, would see those monthly income figures rise to £739 after 5 years, £959 a month after 10 years, £1,240 after 15 years and £1,610 after 20 years.

There is a slight risk with this product that average returns will not exceed the assumed bonus rate, and in such a worst case scenario, income could decrease. But the potential upside is so attractive, that the with-profit annuity option should be seriously considered by retirees after taking professional advice from an independent, ideally fee-based financial adviser.