New pension freedoms means it pays to know when you'll die

The big advantage of saving for retirement in a private pension is it comes from your pre-tax income – in other words, to save £100 only reduces many people's take home pay by £70. So you'll save more than it costs.

Once it's time for you to use your pot of pension savings, you can take a quarter of it as a tax-free lump sum. That isn't changing. Yet what you can do with the rest of it is.

For decades most people have effectively needed to use the money to buy an annuity – this is a product paying you an income (that you pay tax on) each year until you die. Not a bad idea in itself as it means you get the security of knowing exactly how much you can spend. The problem with annuities isn't how they work – it's that the rates are crap

In recent years annuity rates have been crap – so people trading in £100,000 of their pension money may have got as little as £5,500 a year. Plus instead of shopping around to home in on the best rate – most people just went with the firm they saved with – locking in at a far lower rate than needed, so they lost out every year for the rest of their lives.

Now we're to have so-called 'pension freedom'. This means anyone aged 55 and over can take the whole amount as a lump sum, paying no tax on the first 25% and income tax as if it was a salary on the rest of it.

So most people will be aiming not to withdraw too much in a year so it puts them in the 40% rate tax bracket (so roughly more than £42,000). This of course means in future many won't touch an annuity. And to compound that, we learned this week that some with an annuity may be able to trade it in for a lump sum, though how that'll actually work is a big question.

With power comes great responsibility

This new freedom is welcome, but worrying. To quote Spiderman (or technically his uncle Ben), "With great power comes great responsibility". And to get this right you may need superhuman abilities – not good when you remember most retirees picked the wrong annuity.

My biggest concern isn't the much publicised worry that some will splash all their retirement savings on a Ferrari in year one. I worry about the opposite – that many will be nervous about releasing the cash and will therefore sit on it, never spending it, depriving themselves of the benefit and living a worse life than necessary.

Without the guaranteed income of an annuity, the only way to perfectly plan it is to know how long you've got until you die, so you know how much you can spend each year.

There are tools that can estimate this, but the typical life span for a man who hits 65 in the UK is another 18 years, a woman 21. Add a little on that for safety and it means unless you've bad health, you probably want to spend around 4%-5% of what you've got a year. If you think this is a difficult decision to make, it is, which is why in some ways I mourn the fact that many for whom an annuity was a good concept (if a poor deal) won't be considering it in future. With freedom comes a difficult choice. The Government has put some funds into making free guidance available, though we wait to see whether the quality and volume of that will be enough.

We're also currently working on a series of MoneySavingExpert.com guides to saving for your pension and taking your pension income under the new regime. We hope to have them ready for April, details will be in the weekly email.