Cash clinic: If I'm no longer forced to buy an annuity by 75, should I wait?

Q: I AM 73 and am thinking about buying an annuity. However, I am unsure when would be the best time, if ever, to do so. I gather the government plans to end the rules that mean you have to purchase an annuity by the age of 75.

Should I buy now or hold off until the end of the effective compulsion? Or do you think I should avoid annuities altogether? Any advice would be much appreciated.

AC, Midlothian

A: The coalition government proposes to scrap the effective compulsion to use pension funds to purchase a pension annuity at a set age. To this end the government has recently delayed the age that pension benefits have to come into payment from 75 to 77. This is simply to allow some "breathing space" to allow the required legislation to be passed.

It could be argued that the availability of the alternatively secured pension (ASP) meant there was already an alternative to annuity purchase when benefits have to come into payment, but in practice ASP was of little appeal to most because of its tax treatment.

Whether an annuity is of benefit to you depends on a number of factors. Annuity rates are presently low, due to a combination of lower interest rates and increasing life expectancy. This simply means that pension funds secure less income than previously. Annuity rates may improve over time, but this cannot be guaranteed and the opposite may be the case.

At your age, you must also consider the effects of "mortality drag". While annuity rates increase with age, the older you are when you purchase an annuity the less the increase is. This can mean that delaying an annuity purchase proves a false economy.

Your health and lifestyle are also important. If you have a medical condition that could affect your lifespan or are a heavy drinker or smoker, it can be possible to secure higher levels of income. Even conditions that can be controlled, such as hypertension, can secure increased annuity payments.

Annuity income is virtually guaranteed for life. Once drawn you have choice over whether to include a spouse's or qualifying dependant's pension and whether to select a level or increasing income. It would also be possible to select a guarantee period for the annuity to ensure that value is received if you were to die early on.

It is unclear from your question whether you are currently drawing income from your pension. If you are, and are under 75, you will be utilising unsecured pension income (USP). This allows an income, within parameters set by the government actuary's department (GAD), to be drawn directly from your pension fund which remains invested.

You can now continue with your present arrangement past 75 while the new legislation is drafted. But you should note that the GAD rates used currently stop at 75, meaning that a 76-year-old arguably can draw less income than their age would entitle them to.The decisions facing you are important and I would urge you to take independent advice before acting.

• Stephen Hall is a wealth manager within the private client and financial services department of HBJ Gateley Wareing.

If you have a question, write to Jeff Salway, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or e-mail: [email protected].

This above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd and HBJ Gateley Wareing accept no liability on the basis of this article.