What is an annuity?

It is a type of insurance policy that provides a regular income in exchange for a lump sum. On retirement, holders of personal pensions must use their pension pot to purchase one, after taking up to 25% of their fund as a tax-free lump sum if they wish. They can defer that purchase until age 75, by taking 'drawdown' from their pension, but eventually they must convert to an annuity. Their fund disappears, and the once-only purchase sets their income for life. The payout is based on the average length of time people this age group live, not the individual's health.

Why are they not offering good returns?

Annuity rates have fallen in recent years, depressed by falling returns on government bonds and not helped by the Bank of England's quantitative easing. In January 2010, the average annuity for a 65-year-old with a £50,000 pension pot would have paid an annual income of £3495. Today that pension pot would generate an annual income of £2786.

Why has the financial watchdog stepped in?

Age UK Enterprises says almost a third of retirees with an annuity weren't made aware by their pension provider that they could have shopped around. The Association of British Insurers is to launch a new code from March 1 to make the 'open market option' clearer. But the Financial Services Authority (FSA) wants to shake up the market further.