Excitement in the world of pension annuities. Unexpected, but yes. There has been a dust-up between representatives of the pensions industry and the Government over personal accounts. Then Norwich Union, one of the UK’s biggest pension and annuity providers, announced that it is to introduce postcode-rated annuities, meaning that retirement income will vary depending on where you live. Finally, the Liberal Democrats called for new rules to ensure that everyone shops around for an annuity.

We should applaud the Liberal Democrats for trying to force the Government to address the woeful take-up of the open-market option on annuities. Only 40 per cent of people buy an annuity from a different company to that they have saved with. The result is that they could lose thousands of pounds over the life of their pensions.

There is a lot to be said for an early retirement, but it really revolves around the existence of sufficient assets and a healthy pension annuity for an individual to be able to afford it and this is sadly not the case for most people. In a recent survey commissioned by financial services firm MGM Advantage 10% of us want to retire at 55, with most people planning to retire at 60 or 65.

But for those thinking of retiring early and unsure if they can afford it, a change to the pension regulations in 2006 could be helpful. The minimum income from income drawdown was lowered to zero. As a result, at 50 (55 from 2010) individuals can switch their pension fund into an income drawdown policy, take their tax-free cash lump sum and not touch the rest of their pension.

For individuals with a substantial pension fund, a nil income approach to drawdown could mean using tax-free cash to pay off debts, or a mortgage, while the remainder of their pension fund is still invested in growth assets. Alternatively, a relatively small income could be used to bolster earnings as necessary.

While income drawdown has its benefits for early retirees, there is the risk that investments could go down in value as a result of poor investment choices or tough market conditions. Against this, lifetime annuities do offer a guaranteed income.

Kim Lerche-Thomsen, chief executive of  fixed term annuity specialist Living Time, said, “A conventional annuity is one decision in life that you cannot change. You can change your car, your house and even your sex, but not your annuity.”

“At 60, your chances of dying are very small. Even at 75, there is only a 2% chance of dying,” Lerche-Thomsen said. As a result, delaying annuitisation could lead to a higher income when a lifetime annuity is purchased.

Standard Life pensions policy manager Andrew Tully said products allowing retirees to invest in the stock market, but with a guarantee that their income would not fall, would suit part of the market. “We think there is a quite a good opportunity here. It is not for everyone, but it is attractive for those who don’t like the extremes of drawdown and annuities.”

To consider retiring early, the starting point must be to accumulate sufficient assets to be able to consider early retirement in the first place.

The number of pensioners living in relative poverty has risen by 300,000 to 2.5 million over the past year. Yes, in one year. The number of children living in poverty has also increased, by 100,000, to stand at close to 3 million. Now, we can’t help the latter, but we can help the former. If more retirees got the right pension annuity rate at retirement there would be less in relative poverty.

The government claims to have taken some 2 million pensioners out of poverty since 1997. Whatever the truth of that claim, it is clear that the trend is now very much the wrong way.

Labour blames the increase in pensioner poverty on ‘rising food and fuel costs’.

Age Concern says: ‘It is a national disgrace that pensioner poverty levels have begun to rise.’ It accuses the government of ‘failing those that need their help the most’.

So, what’s causing this problem?

And what is the cure? A more generous state pension, perhaps? One off handouts to deal with current food and fuel inflation? And who should pay for it?

And what about longer term solutions? Stronger requirements on employers to provide better pensions, maybe? Or should it all be about empowring the individual to make their own decisions?

The pension annuity market is being improved. There is an ongoing investigation by the Financial Services Authority (FSA) which finds that insurance companies aren’t making annuity options clear enough. Retirees are losing a billion pounds a year because they fail to shop around for the best annuity deal when they retire.

Under rules, known as the open market option, those about to retire don’t have to accept the annuity, or annual income, offered by the company they’ve been saving with. Trouble is that many people still do choose this as the way forward, and it is too often the wrong choice.

The FSA has given companies until the end of the year to improve their position on this important matter; to make options at retirement clearer to retirees.

This website contains comprehensive information about annuities, annuity quotes, and annuity rates, together with the various types of annuities available. Look around. If you know the type of annuity you want go to the online annuity quotation engine and check out some details.

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