Retirement may seem like a long way off for some, but with pensions now being squeezed and living costs hitting the roof, those of us who are approaching the final few years of our working lives need to have a solid strategy in place.
Annuities are essentially retirement funds into which you deposit your life's savings to acquire interest. You'll then get it back - hopefully, with a significant amount on top - bit by bit over your retirement years.
You don't have to opt for this sort of arrangement, of course. Those who are well off may opt to use savings differently, with a big one-off purchase like a home overseas. But that carries some risk, and you could be left without much money if you live a long and healthy life.
There are two basic types of annuity. You can either opt for a lifetime annuity - which guarantees you income for the rest of your life - or a fixed term one for a period of your choosing. It seems counter-intuitive, but the latter are becoming more popular because they tend to deliver better value for money.
At the same time, there is an obvious risk involved with receiving your entire pension with years left to live - especially when you can't guarantee how living costs (particularly for housing and energy) will have changed when you've got everything you're owed.
The type of interest rate you're offered depends largely on how long you're expected to live. Insurance companies want to know how much they can expect to have to pay out, and that means those with health problems can expect to receive higher yearly payments.
Accordingly, expect your insurers to ask you whether you smoke, how often you drink, and whether there are any notable illnesses in your family history. Ultimately, companies are mainly concerned with saving themselves money - so if you've led a healthy lifestyle you are somewhat disadvantaged. And by the same token, if you do have genuine health issues, don't be afraid to disclose them, as it will work in your favour. Before deciding to buy any annuity make your research and compare rates and quotes from few caompnies.
Calculating your annuity yourself can be done online - via Liverpool Victoria and Aviva's websites for example. In addition to the aforementioned details around your health, you'll also need to provide the exact date you plan on retiring, an estimate of your savings and whether you'll be receiving all the payments yourself, or splitting them with a spouse.
It should be stressed that the online tools are only there as a reference guide, and seeking independent, one-on-one advice from local support networks should be seen as essential. There is regulation in place to protect consumers, but that doesn't mean everyone is telling you what you need to know.
There is something you should be informed of - your heirs will not get anything after your death, except there is a special clause and you pay extra. Another downside is that the pension annuities do not keep up with inflation and your income may not match the standard of living by the time of retirement, but you can require your monthly payments to be indexed with the annual inflation rate.
For free, impartial advice, we recommend booking an appointment with The Citizens' Advice Bureau or The Money Advice Service. Ran by local authorities, these bodies are there to help you handle your finances - and you may even be assigned a case worker so you have a direct line in the event of any more confusion.
You may also wat to read about: Savings Accounts