Even after you've chosen your pension you still have to choose an annuity and making the right choice can means thousands of pounds more in your pocket.

Annuities

Although we say 'living off your pension', what we actually mean is we live off our annuity.

With the value of the state pension falling, private or occupational pensions are increasingly important

If you have a private pension you contribute to your pension pot for years and then when you get to retirement age, you take the pot and buy an annuity. Your annuity pays you a regular amount of money each month until you die.

The problem is that the amount you get for the whole of your retirement is dependent on the interest rate at the date of retirement. And that's not been very good. Annuity rates have fallen recently from nearly 9% to about 5%.

Shopping around

That's the bad news, so what can you do about it. Well you can shop around for best annuity rates. Just because you have your pension with one company, doesn't mean you have to buy the annuity from them.

And here is an example of just how much you can make, by taking some time over the decision. The difference between one of the best and one of the worst annuities at the moment (quoted by the Annuity Bureau) would mean this for your bank balance:

• �1,030 a year for a man aged 60 (a 21% difference)
• �1,322 a year for a woman aged 60 (a 31% difference)

The Annuity Bureau and Annuity Direct provide independent advice on annuities.

Income draw-down

Since 1995 you can opt for income draw-down which allows you to take money directly from your pension pot instead of buying an annuity. Income draw-down contracts (also known as a Flexible Pension or Pension Fund Withdrawal) are offered by most pension companies for those with a fund of at least �100,000.

This allows you to defer the purchase of an annuity until age 75, while still drawing a limited, but regular, income.

Staggered Retirement

An alternative approach is known as Staggered Retirement or Phased Retirement. Many people who purchase a pension annuity do not take out any form of built-in protection against inflation. Again you have to be finished with it by the time you are 75 years old. But it enables you to take part of your pension now and leave the rest until later.

There are lots of restrictions which limit the amount you can take and there is a danger that you will destroy your capital. It is worth considering, but once you are 75 you have to go for a proper Annuity.

The Income Drawdown Advisory Bureau is an independent specialist which will advise on income drawdown, as well as phased retirement and annuities.

With-Profit Annuities

Finally there are a few companies which offer "With-Profit Annuities". This enables you to buy an annuity with a guaranteed minimum monthly payout but then you get extra money if the fund in which the money is invested performs well.

There are only three major companies offering these policies at the moment and you do want to take careful advice before buying any annuity. There is some risks attached because if the fund does not perform well then you won't earn as much money.

But because even With-Profit funds have a guaranteed minimum, the risks are limited. And this may be a way to help you combat the challenge of living off low interest rates.

Several important changes have affected the pensions industry over the last few years. Here we provide a summary of the ongoing overhaul in legislation relating to pensions:

Personal pension mis-selling

In 1994 the SIB (now the Financial Services Authority) acted to clean up the pensions industry following claims that many people sold private pensions would have been better off remaining in or joining an occupational scheme. So the pensions industry was required to review all personal pensions sold between 29/4/88 and 30/6/94.

The first phase of the review concentrated on "priority" cases - those who are at or near retirement and those who have died. The deadline for most firms completing the priority cases was December 1998. The second phase, for those who are more than 15 years away from retirement, has been through the consultation process and those who may be affected should have been contacted in the first three months of 1999.

In May 1997 Treasury Minister Helen Liddell started "naming and shaming" pension firms who were not tackling the review seriously enough. Large fines have been levied on the most serious offenders - though the Pru escaped being fined because it is regulated by the SIB and not the PIA.

Bankrupts to forfeit personal pensions

Bankrupts face the prospect of having their personal pensions forfeited following a High Court ruling in Dec 1996. The Landau case ruled that all payments from bankrupts' personal pensions were assets to be used to pay creditors.

Bankrupts will now forfeit their entire pension for life. Insolvency practioners are reviewing bankrupticies going back 10 years.

The Pensions Act 1995

Since 6th April 1997 the Occupational Pensions Regulatory Authority (Opra) is responsible for ensuring that those who run occupational pensions schemes meet their legal obligations under the Pensions Act.

There is an Independent Complaints Adjudicator who can suspend or disqualify trustees. Scheme auditors and actuaries will have to act as whistle-blowers and tell Opra if they think something is wrong.

The Pensions Ombudsman's role has been extended so he can look into disputes between trustees and employers.

The Pensions Act states that if money has been removed dishonestly from a pension scheme the employer must make sure enough money is put back into the scheme to pay future benefits.

If the employer is insolvent and unable to restore the funds the pension scheme will be able to claim compensation (up to 90% compensation). This is administered by the Pensions Compensation Board which will apply a levy on occupational schemes as required.

Trustees

Under the Pensions Act scheme members have the right to choose at least one third of the trustees - Member Nominated Trustees (MNT). Employers can opt out but only if the members, having been given a formal opportunity to object, are in agreement.

A new minimum funding requirement aims to ensure there's enough money in final salary schemes to pay pensions if a company goes bust.

Fund must be valued every three years and, if the expert valuers say there isn't enough money, employers have to increase their contributions to the scheme.

Where a pension scheme invests in the employer's company Trustees now have to make sure that no more than 5% of the pension fund's assets are invested in the employer's shares.

Pensions for divorcees

From 1 July 1996, as part of the Pensions Act 1995, in divorce cases a judge is obliged to look at pensions. The judge will not be able split a pension, but will earmark parts of a pension, parts of the death-in-service benefit and parts of a lump sum payout for the ex-spouse.

A clause on pension splitting has been written into the Family Law Bill, expected to progress though parliament in the next year.

Splitting means that the pension can be divided at the time of divorce. Any capital sum awarded to the wife from the husband's pension fund will be solely restricted to providing a pension income for herself.

Disclaimer: Under the Financial Services Act, we are prohibited from providing personal investment advice by letter or telephone. We are only exempted when we broadcast this advice. The inclusion of any organisation on this fact sheet does not imply any endorsement by the BBC or Working Lunch.