You can use all of your pension fund to buy an annuity guaranteeing an income for the rest your life. Alternatively, up to a maximum of 25 per cent can be taken as tax-free cash straight away, with the balance being used to buy an annuity.

You have to convert your pension fund into an annuity when you reach 75 unless you opt for a new 'alternatively secured pension'.

The amount of annuity which the pension fund can buy will depend on, the size of the fund, your health and lifestyle, the amount of tax-free cash taken at retirement, your age at retirement and spouse's age if a joint life annuity is being purchased, the annuity rates available when you retire and the type of annuity chosen (ie will the income remain the same each year or be regularly increased to cater for inflation and will the income stop when the annuitant dies or continue for their spouse or dependants?).

There is no investment element attached to the conventional annuity and therefore the annual income is guaranteed at outset.

However, there some investment linked options: with-profits annuities and unit-linked annuities. With a unit-linked annuity the annual level of gross income will vary with the level of return on the underlying investment funds. An investor can choose between equity, property, fixed interest and cash or a combination of these.

The income from a with-profits annuity will vary according to the declared bonuses of the insurance company's with-profits fund. The returns on these policies are smoothed out to some extent over a period to try and provide some stability in the underlying returns.

With investment-linked annuities it is possible for any payment to be higher or lower than the previous one. Depending upon investment performance it is also possible that the total income paid may be more or less than with the equivalent conventional annuity.

Drawdown

The alternative way of providing retirement income is income drawdown. This allows an individual to take an income from their pension fund without having to buy an annuity until they are 75.

You must decide whether to take a portion of the fund as tax-free cash at the time of the first income payment as there is no opportunity to take cash at a later date.

The maximum and minimum annual amounts which can be withdrawn are governed by rules set out by the government actuary. The level of income within these limits can be varied at any time, and the limits are reviewed every three years.

The remaining fund continues to be invested and still has an opportunity for tax-free growth. Some, or all, of the fund can be used to buy an annuity at any time up to the age of 75, when one must be purchased. If you wish to use income drawdown you must make sure that your pension provider offers this facility before you retire.

Value protected annuities

These were introduced in April 2006 and are a more generous version of a guaranteed annuity. With this type of annuity, if you die before age 75 you pension pot is returned to your estate, less any income paid out and 35 per cent tax.