Cry freedom for pensions! The state won't listen

The Government's recent defeat in the vote to give a second reading to the Retirement Income Reform Bill – tabled by the Conservative MP Edward Garnier – may suggest that long-overdue annuity reform could finally be on the agenda.

The Government's recent defeat in the vote to give a second reading to the Retirement Income Reform Bill – tabled by the Conservative MP Edward Garnier – may suggest that long-overdue annuity reform could finally be on the agenda.

But those nearing retirement should not get too carried away with the thought of the upper age limit for the purchase of an annuity being abolished, or that they may be given more choice when it comes to spending their pension fund. Industry watchers are sceptical about whether such reforms will be implemented.

"The Treasury and Inland Revenue have already set out their plans on greater flexibility and the type of annuities that can be purchased in the Government's own Green Paper," says Tom McPhail, pensions research manager at independent financial adviser (IFA) Hargreaves Lansdown. "So I think they will fight very hard to stop this private member's Bill scuppering them. They are not in a hurry to change the age limit from 75. I quite understand why the Bill has been introduced and why people resent the age restriction, but I wouldn't expect it to end up on the statute books."

Current rules state that you must buy an annuity – a guaranteed income for life – with at least three-quarters of your pension pot by the age of 75. This is to ensure that you don't blow all your money, and that you receive a guaranteed sum every year until you die, which could be 20 or 30 years after retirement.

Annuities have long been criticised for being too inflexible. If you die shortly after purchasing one, your estate doesn't benefit from the majority of your hard-saved cash. There is overwhelming demand for the rules to be changed so that retirees can leave a proportion of their annuity to their estate, and the Green Paper addresses this.

However, while annuities have been derided, there are no plans to abolish them. The Government feels that people nearing retirement shouldn't be able to do exactly as they like with all their pension savings, particularly as they received significant tax breaks when they invested the money.

But campaigners believe that the reform of annuities would encourage people to save more for retirement via a pension. Howard Flight, shadow Chief Secretary to the Treasury, says: "Ending the enforced obligation to buy an annuity by the age of 75 is central to motivating private sector pension saving. This is becoming increasingly necessary as final salary schemes close and the number of people with money purchase pensions explodes."

If you are nearing retirement and wondering whether you should hold off making a decision because of possible new rules, Mr McPhail believes you are worrying about the wrong thing.

"I would be more concerned about bond yields, which drive annuity rates," he warns. "There is a strong consensus that there is a bond bubble at the moment, with bonds fairly heavily overvalued. If this is the case, and prices come down, it could do a lot of damage to annuity rates."

His advice is to spread the purchase of an annuity over a couple of years by dividing the money into tranches. There is nothing to say you must put your entire pension pot into an annuity in one go, so consider investing it in several chunks over a period of time. The number of investments you make will depend on how big your pension pot is – most providers will not accept a purchase of less than £10,000. By staggering the purchase of your annuity, not only do you get to spread your risk, but the charges should not be any greater than if you had invested your money in one lump sum.

Whether changes to the rules are implemented or not, those nearing retirement must ensure they get the best deal when purchasing an annuity. This won't necessarily be the one offered by your pension provider, so it's important that you shop around for the highest annuity rate you can find, particularly as rates are so low at the moment.

Contact specialists such as the Annuity Bureau, Clerical Medical, Key Retirement Solutions, Millfield Partnership and Sedgwick Independent Financial Consultants for quotes. Hargreaves Lansdown also has an annuity supermarket on its website.

The important thing is to take advice and to consider your options carefully. "The decision whether to defer the purchase of an annuity is a difficult one," says Kerry Nelson at IFA Bates Investment. "The annuity you choose will affect you for many years to come. What you decide will depend on the size of your pension pot, who you want to benefit from it and what other cashflow you have."

Contacts: The Annuity Bureau, 0845 602 6263; Clerical Medical, 0870 602 2244; www.hargreaveslansdown.co.uk; Key Retirement Solutions, 0800 064 7075; Millfield Partnership, 020 8680 5200; Sedgwick Independent Financial Consultants, 01483 406500.