Annuities and retirement – What are the best options

An annuity is a plan that gives you a guaranteed income after you retire. These vary from provider to provider so it's good to shop around to find out what might be best for you.

Can you afford to retire?

To work out if you can afford to retire you'll need to look at how much state pension you'll get, how much you'll get from employee pension schemes and how much from any private schemes you may have paid into.

You'll also have to take into consideration your outgoings such as mortgage payments. If you have other income such as rented property or a small business that will tick over even after retirement then these could affect how much you will get in pension payments. In some cases they won't affect your pension and can be good income streams on top of a pension or annuity.

How do annuities work?

You buy an annuity plan with your pension fund and it guarantees you an income for the rest of your life. This means you don't have to worry about budgeting or saving in case something changes.

People with clean bills of health who don't smoke and are not overweight will receive the lowest sum of money. This is because these people will be predicted a longer life span and that means the sum of money in question will be spread over a longer time.

For example, if you are unwell, you will receive a higher sum of money because the company providing the annuity will estimate how long you have left to live. If you health improves – and there fore your lifespan – you'll still be receiving that higher rate.

Things to think about

Annuity plans cannot be changed once the money has started paying out so make sure you know exactly what you are getting before buying one.

There's no cash-in value, so don't depend on being to cash it in at a later date. JG Wentworth cash now might be a better option if you are looking for cash quick.

You can decide what will happen with the annuity when you die. It can either stop, resulting in a cheaper initial cost, or you can agree to have the payments go to a dependent for an agreed amount of time.

The amount you get from an annuity is based on how much money you've built up in your pension funds. Typically you'll get a small percentage of this money in total but you have the peace of mind that the income is guaranteed and will not change.

You don't have to take the annuity offered by your current pension company. Shop around to find the plan that fits best with your lifestyle and needs.