What is an annuity?

If you’ve saved into a defined contribution pension scheme during your working life, you will have to decide what to do with the pension fund you’ve built up when you approach retirement age.

One option is to buy a lifetime annuity (often called just an annuity). This converts your savings into an annual pension, giving you a guaranteed income for life or a specified period.

A second option comes into force from April 2015. From this date, changes to the rules mean that you won’t have to purchase an annuity if you don’t want to. Instead, if you have a defined contribution pension scheme, you will be able to cash in the whole of your pension pot. This may affect your decision on whether to buy an annuity.

These changes do not apply to defined benefit (also known as final salary) pensions, which guarantee an income in retirement based on your salary before you retire.

Annuities explained by Paul Lewis

Paul Lewis, financial expert and presenter of BBC Radio 4's Moneybox, talks about annuities and gives his tips on planning for retirement.

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