Investors will no longer be forced to use most of their pension fund to buy an income in retirement if a parliamentary Private Member's Bill is passed.

It would mean that instead of having to buy an annual income, known as an annuity, by the age of 75, people would be allowed to invest their pension pot as they saw fit.

The annuity system smacks of the nanny state, it is time we treated people as adults Edward Garnier Conservative MP

Edward Garnier, the Conservative MP who is backing the bill, told BBC News Online that ending the compulsion to buy an annuity was vital to encourage more people to save for their retirement.

Under present rules, in return for tax breaks pension investors must use three-quarters of their pension pot to buy an income for life - an annuity - by the age of 75.

However, annuity rates, which move in line with the Bank of England base rate, have fallen substantially in recent years.

In addition, annuities are widely seen as inflexible because the income paid is based on average life expectancy. And if the annuity holder dies early then the annuity provider keeps the unused pension funds.

Nanny state

Mr Garnier said this made pension saving unattractive for many people: "The annuity system smacks of the nanny state, it is time we treated people as adults," he said.

Edward Garnier MP anticipates bill success

The Retirement Income Reform Bill proposes that people should be free to invest their pension funds as long as they can prove that their investments will produce an income which will keep them from claiming benefits in retirement.

"What is wrong with an investor using their pension to buy rental property as this is likely to pay a healthy income in retirement?" Mr Garnier asked.

Greater flexibility

He said reform could breathe new life into the pension market.

"At present the compulsion to buy an annuity is a disincentive to save, without more flexibility the young will continue to shy away from pension provision."

Mr Garnier anticipates that when presented to Parliament the Bill will be granted a second reading on 7 March.

However, Private Member's Bills have a poor record of becoming law and the government may have other ideas when it comes to the reform of the annuity system.

It is due to publish its Green Paper on the future of UK pensions on the 17 December.

The paper is likely to contain some form of annuity reform but is unlikely to adopt Mr Garnier's proposals.