Money: As I lay dying ...

First it was smokers, then it was fatties. Earlier this week, the increasing fragmentation in the market for pension annuities gathered pace after one company offered a higher retirement income to potential clients - as long as they are dying, anyway.

Stalwart Assurance announced it would enhance the annual retirement income paid to people suffering from cancer, kidney failure, multiple sclerosis, strokes, heart attacks, chronic asthma and diabetes.

Its offer expands on its previous target audiences - smokers - who were promised higher annuity rates when they retired, on the grounds that they are likely to die sooner than their non-addicted counterparts. The success of this policy allowed it to be offered to overweight people, also classed as a significant health risk, as long as they were more than 25 per cent over "normal" body weight.

Experts on this field fully support Stalwart's initiative. Peter Quinton, who runs the Annuity Bureau, a company specialising in finding retirement planning, says: "What was viewed by some as a gimmick has remained one of the most competitive rates on the market and a worthwhile option for many long-term smokers."

In effect, by paying them the same as those in good health Stalwart will no longer penalise those who die early. Stalwart's shrewd marketing ploy also raises the question of how people ensure the best possible pension on retirement.

Annuities provide that mechanism for many millions of people, whether members of so-called money-purchase company pension schemes or with personal pension plans. In either case, contributions made into their schemes throughout their working lives are invested to produce a lump sum. On retirement, the lump sum buys an annual income, or annuity, for the rest of the pensioner's life.

But this not an issue purely for those on the verge of giving up work. Knowing how much income a lump sum will provide on retirement helps to determine the level of contribution into one's existing pension. For some, it may also lay the ground for starting a pension in the first place. Annuities are broadly calculated on the basis of returns paid on long- dated gilts, or government bonds. At present, a lump sum of about pounds 100,000 might buy someone aged 65 an income of about pounds 11,000. The most important thing to remember is that annuities involve an actuarial gamble between ourselves and the companies we deal with - over our own mortality. The three key determinants in this gamble are age, sex and the health of the policyholder. The older one is when an annuity begins to be paid, the larger it will be. Someone hoping to retire at 55 instead of 65 might barely get pounds 9,000 a year from a pounds 100,000 lump sum.

A variety of whistles and bells can enhance certain aspects of retirement income - at the expense of the amount you receive. For example, altering the frequency of the income paid from annually to monthly can cost about 7 per cent of income. Probably of greater importance is the extent to which an annuitant is prepared to ensure dependants are protected after their death. All of these options can have the effect of cutting retirement income to a fraction of what was originally hoped for.

There are ways round this. One way is to protect income by buying a with- profits or unit-linked annuity with the lump sum. These annuities are a form of continuing investment, delivering immediate, but initially lower, income while allowing the underlying fund to grow and hopefully pay out more in years to come. With some companies you decide on how much income to take. One annuity from Equitable Life assumes an anticipated bonus of 6 per cent each year. If that target is achieved, payments remain level. Should bonuses rise beyond that, so does income.

Selecting the right annuity requires proper advice. Ensuring your futuremeans setting aside enough so that when the time to buy the annuity comes, the best choices are not too painful.

Stalwart Assurance deals only through independent financial advisers. The Annuity Bureau: 0171 620 4090.