Pensioners freed from annuity trap at age 75

The government threw a sop to wealthy investors yesterday by confirming plans to scrap the rule that forces them to buy an annuity when they reach 75.

Now they will be able to defer the decision indefinitely as long as they have the resources to maintain an income of at least £20,000 a year. That includes the state pension, so in reality a pensioner will only have to secure £15,000 from their independent pension savings to take advantage of the new rules. The amount they withdraw from their funds, however, will still be subject to tax, which can hit 50 per cent for the wealthiest individuals.

The rule has long been resented by rich investors because of the meagre returns currently provided by annuities – usually offered by life insurance companies – and because none of the pension money used to buy an annuity is returned to the purchaser's estate, even were they to die as soon as a day after the plan had been bought and were therefore able to derive almost no benefit from it.

Geoff Tresman, chairman of Punter Southall Financial Management, said the new rules were important because they offered pensioners much greater control over how much they are able to withdraw from their pension pots after they retire and when they withdraw the money.

Mr Tresman said "Altogether, I applaud the changes and believe that this will have a very positive impact on pension savings in the UK. I would expect them to have the effect of arresting the rapid decline in pension savings we have witnessed in the last decade, due to a combination of the significant hike in taxes applied to pension funds under the previous government and the legislative changes that made pensions more restrictive and complex. The changes announced today, together with the recently announced changes in contribution levels represent very good news for savers."

But Joanne Segars, the chief executive of the National Association of Pension Funds, said: "Such extra flexibility can be useful, but these changes will mainly benefit those with larger pensions and multiple income streams.

"Annuity rates may have fallen recently, but the guaranteed income they offer is usually the best option. We think most people will still end up choosing an annuity. The real problem is that people are simply not saving enough into their pension pot in the first place."