A conventional annuity is a financial product that is designed to provide you with an income for the rest of your life. You buy it with the money from your pension fund.

The minimum income that you receive from the annuity will be fixed at the outset. This means that it doesn’t matter what happens to stockmarkets, house prices or any other investments, the income will continue to be paid out and will not decrease, no matter how long you live.

There are a number of options that you can add to a conventional annuity, which will vary depending on the insurance company you choose. The basic options are:

• A single life annuity – this annuity doesn’t provide a dependant pension and therefore provides a higher income at the outset.
• A joint life annuity – designed to continue to pay out to your dependant after you die.
• A guaranteed annuity – you can choose an option that guarantees to keep paying out your income after you die until the end of a fixed period. This is usually 5 or 10 years.
• A level annuity – pays out the same level of income year after year.
• An escalating annuity – the income you receive increases each year. This can either increase by a fixed rate or be RPI linked, which means it will increase in line with inflation.  

Pros

• Pension annuities promise to pay you a regular income for life. 
• You can customise your annuity to suit you:
  • You can arrange for your dependant to receive an income after you die. 
  • You can choose to protect your income against inflation. 
  • You can choose to have an income that stays the same, or one that starts at a lower amount but increases each year.
  • You can choose for some of the money you invested to be paid back to your estate, if you die within a set period of time.

Cons

• Your annuity is for life. Once you’ve bought it - you can’t cash it in, swap it for something else or alter your annuity options. 
• You could die before getting your money’s worth from your annuity.
• You don’t have the flexibility to control the level of income you receive once it’s started.
• Unless you choose otherwise, your dependants will not be automatically protected.
• Unless you choose otherwise, your income is not automatically protected against the effects of inflation.

If you are nearing 50 and considering retirement, have a pension fund, and you want a guaranteed regular income for the rest of your life, an annuity could provide you with this security and peace of mind.

You can buy an annuity from an insurance company or through a financial adviser. Before you decide, carefully consider the options available on an annuity.  Make your choice based on what you need now, as well as what you’re likely to need in the future. 

If you need more help choosing your annuity you could speak to your pension provider or an insurance company, who may refer you to their advisers. You need to remember not all providers offer advice and if they do, they may only be able to give information about their own products. If you want advice about the whole of the market, you’ll need to speak to an independent financial adviser.

Do your research - decide whether an annuity is right for you by looking at all the available options for funding your retirement and considering the pros and cons of each.

Shop around - you may be able to get a higher income from your annuity by shopping around for the best deal on the market.

Start early - take your time to consider the options available on an annuity, choosing those that best suit your immediate and long-term needs. Annuity rates can change, if you buy now you may get a better rate than if you waited. However this could work the other way around as well, you may get a better rate by waiting. Remember, once you buy an annuity, you are locked in and it can't be changed.

Don’t forget - you can normally take up to a quarter of your pension fund completely tax free.

Check out and compare - the range of annuities and options. Whatever your circumstances or your health, you can find the one which best suits you.

Remember you’re in control - you have the final decision on all the choices you make.

Don’t be afraid to ask - if you have any questions about annuities generally or about a specific product make sure you get advice before making any decisions.