A guaranteed annuity pays out an annuity payment each month for at least the length of the guarantee period, even if the annuitant dies before the end of the guarantee period; in which case the guaranteed annuity payments are made into the annuitant’s estate. The maximum guarantee is ten years. Five years is quite common in practice.

With an inflation-linked annuity the annual payments increase by the rate of increase in the Retail Prices Index (RPI) to give payments protection against inflation.

With an escalating annuity the annual payments increase by say 3 or 5 per cent to give the pensioner some protection against inflation and to allow for possible increased income needs as the annuitant ages.

Joint-life or last-survivor annuities pay an agreed annuity payment to an annuitant and the annuitant’s partner while both are alive. Following the death of the annuitant the contract pays either the same amount or an agreed reduced amount each month until the partner dies. The reduction in last-survivor annuities is typically a half to one third.

Investment-linked annuities involve the fund backing the pension annuity being invested in an equity product. The annuitant receives an annuity payment that is related to the performance of the equity market.

An impaired-life annuity pays an increased annuity payment if the annuitant has health problems, such as cancer, chronic asthma, diabetes, heart attack, high blood pressure, kidney failure, multiple sclerosis or stroke.

An enhanced annuity pays a higher annuity payment related to actuarial considerations.

Phased-retirement or staggered-vesting annuities. With these, instead of converting the whole pension fund, withdrawals are scheduled over several years. This is achieved by splitting the fund into many separate segments.

A with-profits annuity links income directly to the performance of the insurance company’s with profits fund. Typically, income is made up of two parts: a minimum starting income and bonuses.

A short-term annuity allows an individual before 75 to use part of a pension fund to buy a fixed-term annuity lasting up to five years. They can choose annuity options in much the same way as basic annuities.

Value-protected annuities pay a lump sum on the death of the annuitant, equivalent to the difference between the original purchase price and total payments made. The lump sum is taxed at 35 per cent. They are only available until aged 75.

With so many choices it is wise to seek out specialist advice when buying your pension annuity.

Pensions minister Mike O’Brien has said many older people still mistakenly believe that owning a house or having some savings automatically disqualified them from eligibility for pension credits. This is not the case. 

Some 2.7million pensioner households receive pension credit at an average of around £50 a week. The government’s stated goal is that no pensioner over the age of 60 should live on less than £124.05 a week. A bold statement, but even that isn’t really sufficient.

Some estimates put the value of unclaimed pension credits at up to £5 billion a year, and that’s an awful lot of money. The government is planning to write to around 250,000 elderly people over the next few weeks to encourage them to claim.

Help the Aged said tackling pensioner poverty was an urgent issue, and ‘claiming benefits which belong in older people’s pockets is crucial to that’. They estimate that around £5 billion worth of benefits are left unclaimed each year and that money could make a huge difference to the living standards of pensioners everywhere, many of whom are really struggling with the soaring cost of basics such as food and fuel. One years back claiming is possible if the claim is lodged on time.

Gordon Lishman, of Age Concern, said millions of pensioners were missing out on up to £5 billion in Pension Credit and other unclaimed benefits. This could make a ‘huge difference to their quality of life’, he said.

People can make these claims to get what is actually due to them. They shouldn’t be ashamed to claim, and we know many are. This money is better off in their back pockets than with the Government. It has been earmarked to help those less well off and should be taken up. They should make a claim now to ensure they don’t lose out on cash that’s rightfully theirs.

Final salary pensions, sometimes called defined benefit schemes, are the top tier of company pension schemes. Sadly, these schemes are not as common these days as they used to be. Few new employees will be offered them these days. If you die before drawing your pension, most schemes will pay up to a maximum two-thirds of the likely pension you would have got if you had worked with the company until retirement. Many will also pay a death-in-service benefit to a maximum of four times your annual salary.

These payments can go to your husband, wife, any dependent children, or nominated beneficiaries. Scheme rules do vary, though.

These days, most employees are now in money-purchase, or defined contribution, pension schemes, and will use their pension pot when they retire to purchase a pension annuity. You might die before getting that far. If so, your scheme should return the value of your fund at time of death, including employer contributions, tax relief and any growth. Some employers may also offer death-in-service benefits as well.

Premature death with stakeholder and personal pensions…once again, you get your money back, or rather your survivors do, in the form of a lump sum known as “return of fund”. This will include all your contributions, tax relief and any growth. The same goes for members of group personal pensions.

With state pensions, if you’re single, your state pension dies with you. If you are married, and your partner is over 45, they may be able to claim a £2,000 refund lump sum, then the full basic state pension for up to 52 weeks, currently £90.70 a week.

If you’re simply cohabiting, your partner won’t get a penny. This spells disaster for couples who have lived together for years, only for the main breadwinner to die young.

There are some things you should consider doing, regardless of the type of pension scheme you have. When you take out a scheme, you should make an expression of wish, setting out your beneficiaries.

You should also consider writing your plan into trust, setting out exactly who you want to get the money. If you don’t, any payout could end up being decided by probate, which, as we all know, could take months. You should also write a will (and keep it updated), to make sure your wishes are clear and legally enforceable.

The best thing you can do if in doubt is to seek professional advice. Premature death, whether before drawing your pension annuity or after, is a major financial issue. Maybe not for you, but for your dear ones you leave behind.

The Open Market Option gives investors the opportunity to purchase their pension annuity from any annuity provider, regardless of where they have previously invested their pension. All the investor has to do is to find out which provider offers the best annuity rates and options for their circumstances and move their pension pot to that provider.

However, literature from life companies is not clear enough regarding the Open Market Option.  Consumers should be in no doubt that they have a choice of annuity providers and by how much it could increase their retirement income….perhaps up to one-third depending on state of health. 

Pension annuities are complex and consumers need to take advice if they are to receive the best deal.  Factors such as health, or even where the client lives, must be considered as impaired life or postcode annuities can significantly increase income. There are other things to consider, such as death guarantees, inflation increases and widows pensions which will all affect the level of income paid. Only by taking independent financial advice will a person on the point of retirement be sure they are making the right decision and receiving the best available income. This is the service available via this website.

Some thematic work on Open Market Options, recently carried out by the Financial Services Authority, is a step in the right direction, but more needs to be done.

One very strong option would be to force life companies to include open market rates on the quote allowing clients to compare different annuity rates and pension income. At the very least the Open Market Option should be up front and in bold. Some documentation is so unclear it probably wouldn’t be regarded as meeting the Financial Service Authority’s Treating Customers Fairly (TCF) initiative.

They claim this makes the assessment of risk more accurate, and premiums cheaper for everyone, but if you don’t fit the profile or you fall on the boundary you could end up losing out, and quite heavily. This can be seen quite clearly with car insurance and proximity to city centres. 

The theory is that the more affluent you and your neighbourhood are, the longer you live. Glaswegians have an average life expectancy in their early sixties, while people living in Surrey will on average live well into their eighties. The rub is, whilst that is good for the individual living longer with the pension annuity, the more expensive your pension annuity is for the insurance company paying your income in retirement, as it will be paying out for longer. And in recent years, some insurance companies have started taking account of customers’ postcodes when deciding what annuity rate to pay them.

Prudential, a major player in the pension annuity market, argues that the assessment is based on your full postcode, which refers to an average of 14 houses on a street or within a few square miles, but the data about the health and wellbeing of those residents is based only on its existing client base, not the population as a whole.

“Using your postcode to help determine how much you get in retirement seems to be a creeping policy,” says Tony Attubato, from The Pensions Advisory Service. “This is understandable when you consider that Glaswegians typically live to their late sixties whereas those on the south coast often live into their early 80s. But surely a customer’s individual lifestyle and medical situation should determine that risk without taking into account the irrelevant health of those living around them? The difference between annuity rates is significant and those approaching retirement really must shop around for the best rate for their pension pot.”

Therein lies the message. Yes, your postcode can now have an effect on the pension annuity rate you are offered, but there are other important factors which could entitle you to a higher annuity rate; you might smoke, or you might have a condition entitling you to an enhanced annuity or an impaired life annuity. So, shop around.

These figures highlight the way Pension Credit, the means-tested benefit paid to pensioners with small pensions, reduces the incentive for many people to save. Indeed, some research suggests that the average UK saver needs to build up a pension pot of £43,789 to avoid retiring on benefits at age 65. This pension pot then being used to buy a pension annuity for the individual’s retirement income. Interestingly, the average pension pot in the UK today is below this figure, nearer £35,000.

Some say this is a hangover of offering Pension Credit to today’s pensioners, which has helped millions of elderly people, but has also had an effect on the incentive for many to save.

Many people will fall on benefits as they get older because while basic state pension rises each year in line with prices, and most pension annuities have no inflation protection at all, the threshold for benefits goes up in line with wage inflation, which increases at a higher rate.

Non-means tested state pension comes in two parts. Basic state pension, currently £90.70, and state second pension, which varies in amount depending on earnings over your working life. The average combined basic and state second pension is currently £134 a week.

To understand how the means-testing system will affect your pension saving, you need to know how much state pension you are likely to get. You can do this by contacting the Pensions Service by telephone or by visiting their website in the first instance.

Some who have been in the market for years will be fine as they will have large capital gains to cushion any downturn in prices - provided their portfolio is not over geared and they can afford rising mortgage interest payments.  Interestingly, though, one third of all landlords own just one buy to let property and if they bought recently, they could be seeing a loss on their investment. One really isn’t a good long term idea…too much reliance on one property.

For the overwhelming majority of the population, buy-to-let should not be seen as an alternative to making regular savings into a pension. 

Investors’ losses are on paper until they sell their assets and provided landlords have good tenants who pay the rent and it is sufficient to cover mortgage interest payments, the actual value of the property doesn’t matter in the short term. But the chief worry is that they may be forced to sell up because interest payments become unaffordable. 

The risks of using a buy-to-let investment as a way to save for retirement have always been there. Over the long term a buy-to-let investment should still return a healthy profit, and those who have injected a substantial amount of equity into the property should be positioned to ride out a downturn.

Mind you it’s fair to say that equity investors have suffered recently, as well as property investors. The FTSE 100 has fallen 19% from its June 2007 peak. Pension investors would therefore have lost 19% of the value of their UK equity portfolio if they had invested at the top of the market.

It is an interesting issue, and probably the best course of action, if possible, is to build up a large pension pot to be able to buy a healthy pension annuity income at retirement, but also have other means of income, such as buy to let, to top up the retirement income.

From the report: those in the top 20% for earnings could expect to spend £1.55m on their retirement should they live to 100. Spending on transport, recreation and culture, hotels and restaurants, and alcohol and tobacco accounts for 44% at age 65. This then falls to 26% at age 85 and 18% at age 95. The older individual does tend to spend more than others on certain things, but as they are able to do less, they spend less.

Professor Sarah Harper, Director of the Oxford Institute of Ageing, has been quoted on several occasions as saying that soon “90 will be the new 70”. But many people don’t have the disposable income to accompany their physical well-being and living longer.

As we get older, more and more of our budget is eaten up by the basic costs of living. The amount spent on fuel, housing and power increases nearly four fold during retirement going from £34 per week at age 65 to £116 at 92. Those retiring today, born and raised in the long shadow of the second world war, amidst rationing and economic deprivation, may well know a thing or two about sacrifice. 

We should be trying to ensure that people in the decumulation phase are amply provided for the whole duration, but the increase in products such as equity release in recent years reveals that it is not rare for people to run short of income. It is vitally important that we in financial services offer today’s retirees products, services and advice that can save them from foregoing indulgences in their later retirement, in the same way they did at the outset of their lives.

A new plan has been launched to reflect this, the Lincoln i2Live plan. It is a flexible retirement plan that provides with: a unique Income Guarantee Option;  investment choice, regardless of age and taking an income;  flexible death benefits for dependants;  the opportunity to select and vary income;  and consolidate pension assets all in one plan to create an overall income strategy (currently excluding Protected Rights).

There are phased retirement options, and one annual statement for all aspects of their Lincoln i2 Live income plan. They claim it is one plan with many options.

Lincoln i2Live combines three retirement planning products in one arrangement. Depending on their needs and circumstances, clients can select an individual product or allocate funds between them at no additional cost, offering control over their financial future; known as:

i2Live Accumulator®: personal pension 
i2Live Drawdown®: income drawdown
i2Live Annuity®: flexible unit-linked annuity

Another insurance company coming in with a flexible annuity product. What we really need is a major UK insurer to get their product launched to stimulate interest in the domestic market.

Let’s consider annuitisation. It can work within pension annuities invested in unitised funds thereby enabling a higher lifetime income in exchange for giving up capital on death. There is therefore no suggestion that income drawdown will replace pension annuities simply because drawdown can invest in equities and enjoy the benefit of the equity risk premium.

The critical difference between annuities and drawdown is the impact that annuitisation has on the trade-off between income and death benefits. Higher death benefits result in lower income and vice versa - you can’t magic something out of nothing or magic the risk away.

One major reason why drawdown will not replace annuities is the size of pension funds. Too many are too small; over 75% of current funds are less than £30,000 after the 25% tax free cash has been taken. 

Hopefully, fund sizes will increase significantly in the future and this may lead to higher drawdown take up. But there are always going to be a lot of pensioners with insufficient funds to be able to afford the drawdown route, and who will get better value from buying a new generation pension annuity product.