How safe is my annuity if the insurer goes bust?

Partnership, for example, issued a statement to the effect that it had £500m assets over and above its liabilities, and stressed that the "sharp drop in share price has no impact on this excess". It said it was capitalised well beyond the level required to withstand a "one in 200-year extreme event".

But the negative headlines about annuities have prompted wider questions about what would happen in the event of the failure of a provider.

Financial adviser Andrew Dixson-Smith of Eldercare Solutions said: "There is a much greater sense of anxiety about the financial strength of organisations since the failure of Northern Rock and the banking crisis.

"With an annuity, where an income is being provided for life, security is very important. Even when a client does not ask about it, I always explain the protection available to annuitants through the Financial Services Compensation Scheme."

In a broad sense the FSCS will step in to pay 90pc of the value of an annuity, without any upper limit.

But precisely how the FSCS would provide compensation, or how quickly it could be put in place, is unknown.

The FSCS said that since it was established in 2001 no annuity provider had failed. A spokesman said: "Should an annuity provider be declared in default, and we were unable to move the policy to another company, we would then step in to offer compensation. An annuity provider would be covered under our insurance category, which means that the limits of FSCS compensation are 90pc of the claim with no upper limit.

"The failure of an annuity provider is not something that FSCS has had experience with to date, therefore we would be unable to confirm if we would take into account the value of an index-linked annuity."

There are other features within annuity contracts which are very valuable to policyholders but which may not be covered by the FSCS, such as "capital protection".

Someone buying an annuity can, for example, pay more to protect a portion - say 50pc - of the purchase price in case they die soon afterwards.

If someone spent £100,000 on a policy with 50pc protection, on their death the insurer would return £50,000, less any income already paid. The value of the protection would diminish as time passed.

Prudential said that were the FSCS to have to award compensation to annuitants, "the value of an annuity policy would be determined by the Court on a basis to be decided by the Court at that time".

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