Enhanced annuity sales rose by 35 per cent to break through the 1bn barrier last year.
Consultancy Watson Wyatt says sales have increased by 161 per cent since 2001 and it believes the trend will continue.
It estimates that up to 40 per cent of people taking out an annuity may be entitled to enhanced rates.
Enhanced annuities make up over 20 per cent of all annuities sold in the open market in the UK and are offered by eight providers – Just Retirement, Legal & General, LV=, Norwich Union, Partnership Assurance, Prudential, Reliance Mutual and Scottish Widows.
Axa has confirmed it will be entering the market in 2008.
Watson Wyatt suggests the upswing in enhanced annuity sales, combined with increasing longevity, is leading to downward pressure on annuity rates for healthy people.
Senior consultant Mark Joannes says: “There are at least three more entrants to the enhanced annuity market expected in 2008. The impact on standard annuities may force more standard annuity providers to enter the enhanced market as a defensive measure.”
Hargreaves Lansdown pensions analyst Nigel Callaghan says: “As a result of the demise of final-salary schemes, baby boomers reaching retirement and the introduction of personal accounts, insurers can smell huge amounts of money in this market.”