A simplistic approach to the issue of pension annuities could result in the nightmare scenario of pension funds running out during retirement and many pensioners being left destitute, the Irish Association of Pensions Funds (IAPF) has warned.

In a submission to Government ahead of publication of the Finance Bill, the IAPF said that a quick fix approach would not be in the interests of the consumer and could call into question the whole ethos of retirement provision.

In his Budget statement, the Minister for Finance, Mr McCreevy, said he planned to bring forward significant changes to retirement pensions for the self-employed in the Finance Bill.

He said the changes he proposed would be grounded on a number of principles, including removal of the compulsory purchase of annuities by the self-employed.

Traditionally, annuities have guaranteed an income for life. However, since 1992 annuity costs have risen by more than 25 per cent as falling interest rates have made their purchase more expensive.

The IAPF agrees that the existing system may be too restrictive in the area of investment risk but adds that any new structure must address the longevity risk.

"We need to find some mechanism which provides the guarantee of the traditional annuity with the flexibility of an income draw-down facility," IAPF chairman, Mr Paul Faherty said.

The association is suggesting that an annuity should be purchased at a certain stage well in advance of a person's funds being fully used up. "Although more in depth analysis is required before this threshold point can be defined, this might be around the age of 70," Mr Faherty said.

The IAPF estimates that more than 60 per cent of pensioners retiring at 60 are still alive at the age of 80.

However, it calculates that based on a model using an income draw-down facility - an alternative to the annuity purchase where the pensioner retains direct control over his retirement fund and simply cashed in a proportion of it each year to meet income needs - there is absolutely no guarantee that sufficient capital would be left to fund a pension for life.

More than 60 per cent of pensioners could be left with no funds by the age of 80, the association says.

It recommends that a committee representing all relevant interest groups be established to make recommendations.