Annuities

By THIS IS MONEY
Updated: 11:32 EST, 6 June 2008

The Daily Mail City team explains how annuities work.

Dull but worthy?

Yes. Until you are old enough to join Saga, annuities probably don't make it onto your radar screen. But the fact is, unless you have been left a sizeable legacy or marry a 90-year old oil billionaire, an annuity is a key way to get financial security in old age.

What is it?

A guaranteed source of income for the rest of your life (or in some cases for a fixed period). On reaching retirement, most people have a lump sum they have saved through a work pension or a personal plan. But it can be hard to know how quickly to spend it. Investing the cash in an annuity enables you to budget properly so you don't run out.

What's the catch?

If you die early you won't have enjoyed the full fruits of your pension pot. Instead you will be lining the pockets of the insurer who sold the annuity. But if you live to a ripe old age, you will probably be mightily relieved the insurer is footing the bill.

Do I have to?

Yes. The Government says anyone with a pension fund must use it to buy an annuity by the age of 75. You can take up to a quarter of the money tax-free as a lump sum, but the rest must be invested in the annuity. Critics say consumers should be given the freedom to choose what to do with their own cash.

This is Money can help you choose the right annuity

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