SOME pension investors who avoid buying an annuity so they can retain their pension fund risk drifting into financial hardship in their old age because their investment strategy may no longer add up.

That is the warning from John Metcalf wealth management director for York firm Pearson Jones.

He suggests many of the nationally estimated 250,000 people who together hold £20 billion in pension “income drawdown” plans should review their position and consider at what point, if any, they should switch over to buying an annuity.

The need to review alternative pension arrangements became more important after April’s relaxation of the rules on income drawdown, which abolished having to buy an annuity at age 75.

Mr Metcalf, said: “It will become too easy for some people to drift into unsuitable investment strategies which may lead them unwittingly into relative poverty. This is because, the older you get, the higher the return you need from an income drawdown arrangement to beat an annuity.”

A key attraction of income drawdown has been the possibility to pass on the remainder of your fund to your surviving spouse or the next generation when you die.

Previously, where this happened before age 75, lump sums were taxed at 35 per cent. However since April, the tax has been increased to 55 per cent which Mr Metcalf says should force some people to rethink their strategy.

Mr Metcalf said that, as investors can exit a drawdown and buy an annuity at any time, it was possible to calculate how much mortality cross-subsidy was worth at different ages and this could help investors know when to change their approach.

“Because previously people have had to move into an annuity at 75, the issue of the mortality cross-subsidy has been largely hidden. Now that the 75 age limit has been removed, there is a fear that people will think they can simply stay in drawdown indefinitely. But just because they can, does not mean that they should.”