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If you are having difficulty working out what annuities are, think of them as the opposite of a UK mortgage. Instead of you paying back monthly rates in exchange for one lump sum from a bank or building society as would happen with a mortgage, you are receiving monthly amounts from a life insurance company in exchange for a lump sum - your annuity.

The difficulty is how to get a high enough monthly amount from the life insurance company in exchange for the lump sum. It sometimes seems unfair that people who lead an unhealthy lifestyle are the ones who get the better deal, but this is for a very good reason.

Basically, the longer you are expected to live, the longer the company will have to pay you money in exchange for your annuity. That means that people who do not have a great life expectancy, such as smokers and obese individuals, don't cost them as much in the long-run and are therefore more likely to receive a better annual settlement.

It also means that the older you are when you cash in your annuity, the better the deal you'll get. And, because women tend to have a longer life expectancy than men, they get a lower rate. So, a healthy 65 year old woman will get a much lower annuity rate than a male smoker of 75 years of age.

Why not invest the money myself rather than selling it on?

Life insurance companies should be able to get a much better return on your money than you could if you invested it yourself because they invest in high yield fixed interest stock.

What are the different types of annuities?

A Standard Annuity will pay out for as long as you live, whether that is one month or thirty years after taking it out. It is up to the insurance company to decide how long they think you will live for, and the payments they make to you reflect this - if you live longer than they expected they lose out, but if you pass away shortly after handing over your lump sum, they make a considerable profit.

A Guaranteed Annuity differs from this by guaranteeing a fixed payment for a fixed term, even if you do pass away. Be aware though, that because the company is aware of the length of time they will have to pay out for, the annuity rate will be considerably lower than with a non-guaranteed variety.

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