Of course, the truth is that there is no compulsion to buy an annuity with your pension fund when you reach 75. It is just that the options open to you are so complex or offer such poor value that you are left with little choice.
 
To recap on the current situation -
 
Before the age of 75 you can withdraw benefits from your pension plan through the purchase of an annuity or through the withdrawal of funds directly from your pension pot, known as unsecured pension income (USP). The former provides a guaranteed income for life, whilst the latter provides for the possibility of a lump sum paid on your death to your beneficiaries and the prospect of a higher income. However, the investment risk falls on the individual and they could receive a lower income and if events have worked against them, a lower annuity at age 75 than they would have enjoyed had they purchased an annuity in the first place.
 
At age 75, USP ends to be replaced by Alternatively Secured Income (ASP). ASP is the poor relation of USP; There is no lump sum death benefit and the income is lower, making it almost useless for all but a few people.
 
The government has issued a consultation paper which proposes to remove the 'age 75' issue altogether and replaces it with two different types of USP. There will be 'capped drawdown' and 'flexible drawdown'. Under 'capped drawdown' there will be a lower level of income than that available currently under USP but the drawdown can continue beyond age 75 with a lump sum death benefit always available to beneficiaries. 'Flexible drawdown' will offer a higher level of income but will only be available to those that can demonstrate sufficient levels of secure income elsewhere, the logic being that should the fund 'run-out'  they will have other avenues of income thus preventing them from having to claim on the state.Again, a lump sum death benefit would be payable on death.
 
This is simplification compared to the current arrangements though many questions remain unanswered. The intention that the balance of an individuals pension fund is made available to their family on their death has to be good news, with the argument that a pension fund 'dies with you' no longer holding true. However, it should also be remembered that drawdown is normally only suitable for those with larger funds and annuities still remain the best option for most individuals due to the guarantees they offer and the peace of mind these guarantees give.
 
The consultation period ends on 10 September with the final legislation being enacted form the beginning of the 2011/12 tax year. The full document can be found at http://www.hm-treasury.gov.uk/press_28_10.htm
 
If you would like further information on this matter, please contact Eric Norman-Walker or your usual adviser at Menzies Wealth Management. Our email address is advice@menzieswm.co.uk