When you retire your company or personal pension will normally provide you with a tax free lump sum payment. The balance can then be used to secure an income for your retirement and there are a number of options open to you, such as an unsecured pension or phased retirement. However the most common solution is to purchase an annuity.

At is simplest; a lifetime annuity converts part of your pension into an income for the rest of your life, however long you live. The level of income you receive depends on a number of factors including:

• The value of your pension fund after you have taken out any tax-free free lump sum.
• Whether your fund includes national insurance rebates because you contracted out of the additional State pension.
• Your health or lifestyle, with some annuities providing a higher than normal income if your health is poor.
• Your age as the older you are the higher the income you will get. 
• Your sex, with the starting income for a man being generally higher than for a woman because of men’s shorter average life expectancy.
• The benefits you choose such as whether the annuity is just for you or for you and your spouse?

If you have no spouse, partner or other dependants, a single life annuity may be suitable as this will cease to make payments upon your death. However, if you need to provide an income to your spouse, partner or financial dependant after you die, a joint life annuity may be more appropriate. This will continue to provide for your spouse or partner until their death, or for any dependant children until they reach a certain age.

After you die, the income paid under a joint life annuity will be a proportion of the income you were getting just before your death, and you will need to choose that proportion at the time you take out the annuity. A higher proportion has a higher cost, and so your annuity income will be lower.

Joint-life annuities are more expensive than single life, and some providers may not offer such an annuity if your spouse or partner is more than ten years younger than you. Meanwhile some schemes insist that the after death proportion is 50% of what you were receiving. You should also check with your provider whether your partner will be eligible to receive the income if you are not married or in a civil partnership.

Another consideration is whether you should go for a level or for an escalating annuity. The former pays the same income each year for the rest of your life and gives a higher starting income than an escalating annuity. However, the latter pays an increasing amount each year and so can help protect your income from rising prices. There are two types of escalating annuities:

•  Fixed rate, where your income is guaranteed to rise each year by a set percentage
•  RPI linked, where your income is adjusted annually to reflect changes in the Retail Prices Index

You may be eligible for an enhanced annuity which provides a higher income if you have a health problem that threatens to reduce your lifespan (e.g. cancer, diabetes, heart attack, high blood pressure etc). Being overweight or a regular smoker may also make you eligible, while some companies offer higher rates to people who have worked in certain hazardous occupations.  

A final consideration is whether to opt for an investment-linked annuity which will invest your fund, usually in stocks and shares. This lets you benefit from stock-market investments after retirement, but has the added risk that the value of your investments could fall. Investment annuities will offer a choice of funds but usually have higher charges than basic annuities and so could reduce your retirement income They can either be:

• with-profits which link your income directly to the performance of the insurance company's with-profits fund
• unit-linked which link your income to the funds you invest in.

As you can see, there is a lot to think about when arranging an annuity, and while this section provides an overview, it is still worth having a talk with your Independent Financial Advisor who should be able to provide you with more information and to help you decide what approach is most suitable for you.