Standard conventional annuity

It provides a guaranteed income for the rest of your life, and also for the life of your widow, if required. It can be level or increasing at a fixed rate each year, or index-linked, so increasing broadly in line with inflation.

Standard annuity rates are driven day to day by the performance of gilt yields, and no underwriting is required.

Advantages – Removes investment risk. Provides certainty. Can protect income against some of the effects of inflation if increasing option is chosen. Because inflation is currently low, the option of index-linking is relatively cheap at the present.

Disadvantages – No flexibility. Once the annuity has been purchased there is no facility to change the terms of the payments. May not provide sufficient income for your widow. If you take an increasing annuity, the starting income will be lower. If you take a level annuity, starting at a higher level, inflation will reduce the real value of your income over time. Once the annuity is purchased your pension fund is lost to your heirs.

CHECKLIST: Is a conventional annuity right for you?

	About you and your attitudes	Yes/No
1. Amount of Pension Fund	Less than £100,000 (after tax free cash)
2. Alternative sources of income	None or few
3. Valve of other liquid assets	None or limited
4. Attitude to risk	Cautious (at maximum)
5. Income growth potential	Only if it can't fall

Even if your fund is greater than £100,000, if you answer “Yes” to 4 and 5, you should still opt for a conventional annuity.

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