Beginners' guide to pensions and retirement

Annuities (Secured Pension):

An annuity is a plan which provides regular income payments or ‘instalments’ for life, in exchange for a lump sum (your pension pot). Once you have decided to buy an annuity, you must choose which type suits you best.

• Level annuity. Your payments are fixed at the outset and continue at this level until you die.
• Escalating annuity. Your payments can change each year. For example, you may choose an annuity which increases at a fixed rate each year of, say, 3% or 5%. Or you may choose an annuity which changes in line with the Retail Prices Index (RPI), commonly referred to as the cost of living. It is likely that your annuity payments will initially be less than that available from a level term annuity.
• Unitised annuity. If you buy a unitised annuity, you link your income to the performance of an investment fund or funds. This means your pension income could go down or up. There are typically no guarantees.
• Enhanced annuity. (Sometimes called impaired life annuities). People with medical conditions which could reduce their life expectancy such as high blood pressure, cancer or diabetes could get a higher income from their annuity. They’re paid more because the annuity company believes their life expectancy is less.