Annuity mis-selling leaves up to 1.5 million pensioners out of pocket

Some pensioners left penniless by annuity mis-selling.

As many as 1.5 million pensioners have been mis-sold annuities, leaving some penniless.

That's according to a new report from the Government's Older Workers’ champion, Ros Altmann, which exposes some overly-vague selling practices within the industry.

Among them are 530,000 pensioners’ widows said to be penniless because their partner misunderstood which annuity they chose. Even now, guidance for pensioners is still shrouded in jargon, so it’s easy to make a mistake on this crucial, irreversible financial decision.

One such example is the ‘ten-year guarantee’. This means that you’ll have a payout for ten years after you set up the annuity; however, some pensioners may think that it covers their partner 10 years after their own death. 

Mis-selling can also happen when providers fail to ask basic questions on aspects of the buyers’ lives such as health, dependants and partners.

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The figures

Altmann estimates that there are 300,000 annuities bought each year, which equates to three million over the past decade. All of these people are at risk of having bought (or been sold) the wrong annuity as the quote provided by sellers is often the standard single life, level annuity.

However, the ones most at risk are the 60% who took out annuities in sales which were non-advised and did not have guaranteed annuity rates. 

According to Altman's study, around 900,000 people should have got enhanced annuities.These are annuities which people may qualify for because they smoke, are on medication or have conditions like diabetes and heart disease. Enhanced annuities pay out more than standard ones, as essentially you are more likely to die at an early age. However, they may not have been asked sufficient questions about their health when they took out the annuity, meaning they ended up with a standard annuity instead.

A further 530,000 widows and widowers missed out on the correct benefits as a spouse, as they thought their annuities would pay out after their partner's death.

And 90,000 people with small retirement pots were sold the wrong annuity.

And those mis-sold annuities would have been worth as much as an incredible £8.5 billion.

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Getting the right type of annuity

Too many lose out on better annuities because they don’t shop around. You needn’t stick with your current pension provider for your annuity - you are much better off shopping around via the Open Market Option (OMO).

The best place to start is to get a benchmark quote from your current pension provider six months before you retire. You’ll be given a rate as a percentage which you’ll need to multiply by your pension savings to calculate how much income you’ll get every year.

Your pension provider will send you a ‘wake-up pack’ at this stage anyway, telling you the value of your pension pot, the different annuity types available and the benefits of shopping around. It will also have to specify which annuity types it does and doesn’t offer.

Around ten weeks before you retire, you’ll get a follow-up pack reminding you to make a decision. That said, neither the wake-up nor the follow-up pack contain application forms for taking out an annuity so it’s up to you to get this arranged, with or without a financial adviser. You could go it alone if you’re more clued up and confident when it comes to annuities.

For those of you who opt for the Open Market Option, your funds will be released from your pension provider to your new provider once you’ve made a decision.

It's worth remembering that many more people qualify for enhanced annuities now than in the past.

The Hargreaves Lansdown Retirement Service found that over 60% of its clients are eligible for this type of insurance, which could boost your total income by as much as 40%. On an even more positive note, 80% are selecting death benefits in the form of joint life annuity or a guaranteed period, leading to fewer penniless widows and widowers.

A quarter of people who took out annuities last year bought enhanced ones which is a huge jump when you consider that back in 2003 just 2% of annuities were enhanced.

Be sure to read our guide on How to buy an annuity.

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Further investigation

The FCA is carrying out its own review into annuity mis-selling which may support the evidence for compensation claims. It’ll be published later on this month.

Last week Aviva admitted to selling standard rather than enhanced annuities to 250 customers. It has offered them back-dated payments of about £500 each and will adjust payouts from now on.

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More on investing and pensions:

Too old to make good financial decisions

Millions of self-employed people have no pension

The currency swindle that’s costing your pension £300 a year

Biggest money mistakes made by the over 50s