• level;

• increasing; and

• investment linked

• the amount that you have in your pension fund;

• your age, sex and your health at outset;

• the benefit options that you choose, such as whether it's just for you or for a partner as well.

The amount of income an annuity provides each year in return for the lump sum from your pension fund is called the 'annuity rate'. Annuity rates are usually quoted for a man or woman of a given age. You may see an annuity rate expressed as a percentage. For example, an annuity rate of 6% is the same as £600 a year income for every £10,000 invested. Annuity rates change frequently, so do shop around for the best deal as you near retirement.

Usually, the starting income from the same size of pension fund is higher for a man than for a woman, assuming they are the same age. This is because, on average, men do not live as long as women of the same age.

The income that you get at the start of an annuity is higher the older you are. This is because, on average, an older person has fewer years left to live than a younger person. So, an older person's pension fund does not have to last so long.

You can usually choose for your income to be paid every month, every three months, every six months or once a year. You can also usually choose to be paid in advance or in arrears - you normally receive less if you choose payment in advance, although you would get your income sooner. There could be a tax advantage by choosing a payment in arrears (e.g. John Smith retires and his earnings for this tax year already make him a higher rate tax-payer. If he takes his annuity straight away it will be taxed at 40% in this tax year. In the next tax year John's only income will be his annuity and this is not enough to make him a higher rate tax-payer, it will only be taxed at the basic rate. By choosing to delay his annuity income, John has saved the difference between higher rate and basic rate tax on the annuity income that would have been paid in the tax year that he retired.)

Level annuities pay a higher starting income - compared to increasing annuities. Think carefully about the effect of inflation. Could you really cope with having no increases at all in your annuity income during your retirement, which could last 30-40 years?

If inflation averages 3% a year, the buying power of Harry's pension would fall dramatically as retirement progresses. After 10 years his £2,800 annual pension would only buy the same as £2,000. After 20 years it would fall to £1,500, and after 30 years would be £1,100. If inflation averages more than 3% a year then the buying power of Harry's pension will fall even further and faster.

• escalating annuities - your income is guaranteed to increase at a fixed rate each year, commonly 3% or 5%.

• RPI-linked annuities - your income is adjusted each year to reflect changes in the Retail Prices Index (RPI) - the main measure of inflation used by the government. So, if inflation is 3% one year, then your income goes up 3%. If inflation is 10% next year then your income goes up by 10%. However, your income is not guaranteed to increase each year - if the RPI did not rise, nor would your income. If the RPI fell, so would your income.

With an increasing annuity, the starting income is a lot lower than you would get from a level annuity. For example, for a man aged 65, the starting income from a 5% escalating annuity might be two-thirds or less of the amount from a level annuity. It could take more than 10 years for the escalating income to catch up, and nearly 20 years before the total that you would have received from the escalating annuity exceeded the total from a level annuity.

Investment-linked annuities offer the chance of a higher income than you can get from level of increasing annuities (often called 'conventional annuities') linked to fixed interest assets such as gilts and bonds. But you need to be comfortable with linking your income in retirement to the ups and downs of the stockmarket.

Investment-linked annuities are more risky than conventional annuities because:

• your income is likely to change each year, so could go down as well as up.

• the size of any increase is unpredictable

If the risk of an unpredictable and possibly falling retirement income worries you then stick to conventional annuities.

Usually, your starting income is based on an 'assumed (or anticipated) bonus rate' ABR. You choose the ABR at the outset from a range set by the insurance company - for example 0% (which assumes no bonuses at all) to 5%. Once chosen, most insurance companies do not allow you to change the ABR.

Your choice of ABR may depend on your need for income. For example, suppose you intend to carry on working for now. By choosing a low ABR you can plan for a low income now, increasing by the time you fully retire.

The insurance company announces new bonus rates every year. If the rate equals your chosen ABR then your income does not change. If the declared bonus is higher than the ABR, your income increases. But, if the bonus is lower than the ABR then your income falls.

If you choose a low ABR, your starting income is low. But, you increase the likelihood that future bonuses will exceed the ABR and that your income will rise. You also reduce the risk that your income will fall. If you choose a higher ABR, your starting income will be higher.

If you choose the lowest ABR of 0% - in other words, assuming no bonuses - your starting income will be the minimum. As long as the company declares a bonus, your income will increase. In general, your income cannot fall because the bonus rate can never be lower than 0%. (However, if long term stockmarket performance was very poor, even this minimum starting income could be cut, except in the case of with-profits annuities that guarantee the minimum).

The more risky the underlying fund you choose, the more your retirement income may vary - both up and down.

Some unit linked annuities work in a similar way to with-profits annuities. Your starting income is based on an assumed growth rate (similar to the assumed bonus rate). If the fund grows at the assumed rate, your income stays the same. If growth exceeds the assumed growth rate, your income increases. If growth is less than the assumed rate, your income falls. A few unit-linked annuities let you invest in a 'protected fund' which limits the fall in your income.

Most unit-linked annuities do not guarantee any minimum income. Even if your income is based on an assumed growth rate of 0%, your income could still fall if the underlying investment fund falls.

Unit-linked annuities are higher risk than either conventional or with-profits annuities.

Both conventional and investment-linked annuities can be `single-life' or `joint-life last survivor'.

A single-life annuity pays out only during your own lifetime. A joint-life last survivor annuity pays out until the second person of a couple dies.

On the first death, some annuities carry on paying the same amount to the survivor. With others, the amount is reduced ­ for example, by a third or a half. You usually choose at the outset how much income you want the survivor to get.

If you have a wife, husband or partner who is financially dependent on you, you should normally choose a joint-life last survivor annuity ­ unless you have other assets or income for your dependants to live on after your death.

With some pension schemes, it is the law that you must opt for an annuity that provides a pension for your widow or widower equal to half the income you were getting. Your provider can tell you if this applies to your plan or scheme.

He opts for a joint-life RPI-linked annuity, which provides:

• a starting pension of £3,225 a year;

• a pension for Emma if Jack dies before her. This will be one-third less than the amount paid when Jack was alive. Based on the starting income, this would be £2,150 a year (2/3x £3,225);

• increases in line with inflation to ensure that both the original pension and Emma's widow's pension keep the same buying power throughout retirement.

These sorts of annuity commonly guarantee to pay out at least five or ten years' worth of income, even if you die within this period. On your death, the income may continue to be paid for the rest of the guarantee period, or it may be paid as a lump sum to your estate (and inheritance tax might be due on it).

If anyone is financially dependent on you, do not look on a guarantee period as a substitute for a joint-life last survivor annuity. If you live to the end of the guarantee period, the survivors will get nothing.

Harriet gets an income of £2,160 a year. Whatever happens the annuity guarantees to pay out 10 x £2,160 = £21,600.

After only two-and-a-half years, Harriet dies. The annuity has paid her a total income of £5,400. The rest of the guaranteed benefit goes into her estate and will be distributed according to her will.

Value Protection - a new benefit should you die before age 75
People are often concerned they may not see the full value from their annuity if they pass a way in the early years - value protection means this eventuality is taken care of.

A lump sum can be paid out in the event of death before age 75 but you are also safe in the knowledge that income will be paid out for life, even if that is longer than you had planned for financially.

You can choose to protect up to 100% of the value of your pension fund. Adding value protection will reduce your pension income and you need to be sure that you can still meet your needs.

If you would like to consider this option then you you will need to call us to obtain specific quotations.