More flexibility on pensions planned: Making decisions without market knowledge can cost retired people thousands, warns Nic Cicutti

THE GOVERNMENT is planning to allow greater flexibility for those who want to live off their retirement money without having to buy an income from their pension fund right away - but not yet.

Until then, anyone aiming to buy retirement income needs to shop around for the best offer for a pension lump sum.

Peter Quinton, managing director of the Annuity Bureau, a company specialising in annuities, said: 'Too often, the once-in-a-lifetime purchase of a retirement annuity is made without market knowledge, which can rob retirees of thousands of pounds of retirement income a year.'

Annuities broadly reflect the interest paid on gilts, which stood at about 6.3 per cent in January. At present it is about 8.8 per cent.

Figures from the Annuity Bureau show a single male aged 60, who did not want his pension to rise in line with inflation, would have bought an annual income of pounds 8,929 from Prudential with a pounds 100,000 lump sum in December last year.

The Pru was last month offering an income of pounds 10,600 for the same sum, an increase of 18 per cent.

Scottish Widows has raised its rates over the same period by 16.6 per cent, from pounds 8,890 to pounds 10,370. Not all companies are so generous. NPI offered pounds 9,193 in late December but has only raised this by about 2.5 per cent to pounds 9,395.

The changes, announced in last month's White Paper, will allow people to put off having to buy an annuity until they are 75. They would still be able to take an income from their pension lump sum, which would still be invested with the chance to grow further.

This could put to an end to cases where people in retirement are forced to live off small incomes for the rest of their lives purely because they had to buy an annuity when rates were low.

Some companies have already tried to launch similar products. But, as recent falls in the stock market have shown, such schemes are not risk-free.

Trevor Lock, a West Midlands company director, is one pension plan holder who preferred to take advantage of rising annuity rates rather than hold on in the hope of better future returns.

Mr Lock, of Sutton Coldfield, started an executive pension plan with Allied Dunbar in 1979. The fund's value after tax-free cash was taken came to pounds 476,500.

His maximum annual pension entitlement under Inland Revenue rules was pounds 31,155 gross. Mr Lock, aged 61, says: 'I also knew what I wanted in terms of providing for myself and my wife Beryl.

Mr Quinton says that if Mr Lock had simply wanted an annuity, with nothing for his widow when he died, Allied Dunbar would have paid pounds 33,790 a year. On the same benefits Equitable Life would have paid pounds 36,051 and Standard Life pounds 34,746.

Mr Lock opted for a pension giving a 50 per cent widow's benefit in the event of his death. He asked to take income annually in advance and for it to escalate according to the retail price index rather than by a fixed percentage.

If he dies within the first five years his estate will receive any outstanding lump sum.

Now, the position is completely different with Equitable Life offering the worst deal at pounds 29,448. Allied Dunbar does not pay RPI escalating annuities, while Standard Life offered the best rate at pounds 30,152.

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