Annuities have become increasingly popular due to rising rates but many who hold them do not fully understand how they work.

Close to half (47%) of retired annuity holders who would likely qualify for an enhanced annuity do not know they exist, according to research from insurance and investments provider Legal & General.

Only 4% of the over-50s surveyed who planned to get an annuity, or were considering one to fund their retirement, were considering an enhanced rate annuity.

Enhanced rate annuities offer higher payments for people who are assessed as being likely to face health problems later in life which could shorten their lifespan.

Lorna Shah, managing director of retail retirement and CEO of Legal & General Home Finance, said: “Despite annuities becoming increasingly popular, not enough people understand the nuances of how they work.

“Annuities are based on average life expectancies – the longer you are expected to live, the more the provider expects to have to pay out, so the lower your rate. The flipside of this is, if you have health or lifestyle conditions which indicate your life expectancy might be below average then you may qualify for what is called an enhanced annuity, which has a higher rate.

“This uplift in rate for people who might face health problems later in life, could in fact be put towards care or support for those health needs.”

• Opinium Research surveyed 3,000 adults over the age of 50 on behalf of Legal & General between 4 and 26 January. Of these 1,766 were currently in retirement.