There are two types of annuity:
These are bought with money from a pension fund. Part of the pension fund is paid out as tax-free cash, but the remainder MUST be used to purchase an annuity.
Purchased life annuities can be bought using your own money. Part of the income you receive will be tax-free.
You are free to purchase your annuity from any provider – you do not have to buy it from the company you built up your pension fund with. There is a lot of choice regarding the type of annuity you can buy and the additional protection you can take out. Possible variations include single or joint life, level or escalating, guaranteed or not and enhanced or impaired life. It is therefore important that you understand all the choices available – it might be worth consulting an Independent Financial Adviser to explore your options.
The FSA produce a helpful fact sheet which can be downloaded from: http://www.fsa.gov.uk/consumer/pdfs/annuities.pdf