Have you tried a Tubus Lower Rack Mounting Kit to move your rack back some? I have also seen similar items, but I don't remember the name of them.

While a rear reflector is a start I think a combination of active and passive lighting would be better. I have a Planet Bike Rack Blinky attached with the Planet Bike Tail Light Bracket that came with it.

I have also mounted a rear light on the left seatstay using the supplied seatpost mounting kit and some pieces of old rubber inner tube.

I think if you extend the rear rack some you should be able to use any panniers you want.