An annuity is a secure regular income usually paid for the rest of your life, which is normally built up via a pension plan throughout your working life. The annuity is the regular income that is bought with your pension fund at retirement.

Once set up, the annuity is normally fixed and offers a secure income for the rest of your life, although there are options to fixing the income, for example you could have an increasing income via an indexed linked annuity.

The amount of pension income you receive from the annuity will be dependent upon your age, whether you are male or female, the size of your pension fund and even other circumstances, such as the state of your health or previous occupations. As there are various options to select for your annuity, it is always a prudent idea to seek guidance or advice.

Are they flexible?

In the main no! The majority of annuities purchased cannot be altered, surrendered for cash or transferred. This makes it absolutely essential to choose the options that suit your circumstances best. So when you are ready to convert your retirement fund into an income via an annuity take some time to consider the options available.

Single life annuities - this annuity will pay only to the person named in the annuity and once they die the annuity payments (income) stop. There is no provision for remaining partners or dependents. If you do have financial dependents, you really do need to consider what they will live on after you die and the annuity has ended.

Joint life annuities - this option means the annuity pays its income until the annuitant (purchaser) dies, it then carries on paying to a named partner or dependent for the rest of their life too, usually at a reduced rate.

Level annuities - will pay the same fixed amount each month for the rest of your life.
'Escalating' or index-linked annuities - here the income paid will increase by a fixed percentage (e.g. 3% or 5%) or alternatively by the rate of inflation each year. This type of annuity pays much less at the start, but the income in the later years of your life will be higher in real terms than for level annuities.

Should you have no other protection against inflation, it would be important to consider the benefits of an escalating annuity. Alternatively, some consider the lower starting income of less value, but it is important to remember that around 3% inflation per annum can have the effect of halving the real value of your income within 20 years or so.

Guarantee period - Annuity companies typically offer a five-year guarantee period on your income, this means if you were to die within five years of buying the annuity, the company will still carry on paying your income to your estate upto the fifth anniversary. However, you can select up to a maximum 10-year guarantee period, this has the effect of reducing the income slightly, compared to the five year guarantee.

'Impaired life' or 'enhanced rate' annuities - If you are a smoker, have a history of illness, you could obtain a higher annuity income. Some insurance companies will pay a higher income if you have certain medical conditions. Statistics show that people with some health conditions have a shorter than average life expectancy. These specialist insurers use this to your advantage: they will pay you a higher income because they calculate that, on average, your income should be paid out for a shorter period of time.

Investment linked annuities - The income you receive will depend upon the performance of the chosen investment markets. A proportion of your pension fund remains invested, in products like unit trusts, investment bonds or with profits funds, in the hope that the eventual payouts will be higher later in your retirement, but this is not guaranteed. These may not be suitable for you if you don't want to take any further investment risk.

Flexible Access Drawdown - This option is not an annuity. It allows you to continue investing your pension fund whilst taking some income out. Again, this carries investment risk, and will typically have higher charges. Income Drawdown will not be suitable for all customers. Unlike an annuity there is no guarantee that an income will be paid for life. Withdrawals may erode the pension fund and annuity rates may be lower in the future, leading to a reduced level or loss of retirement income.

The value of investment income from them can fall as well as rise and you may not get back the full amount invested.

No, not necessarily. Many of the pension rules governing retirement were changed on the 6th April 2006, previous rules governing pensions dictated that Annuities had to be purchased by age 75. However, the government announced that the old rules would be relaxed from April 2011 onwards.