Pensions: Read small print, don’t settle for less

People with pension contracts from the 1980s and early 1990s are most at risk of losing out. Picture: TSPL

Millions of people have terms in personal pension contracts taken out in the 1980s and early 1990s that offered them a fixed rate of annuity when they retired.

Yet many have been forced to settle for pension income levels that are often worth less than half the valuable guaranteed annuity rates they were entitled to. Low awareness is partly responsible, but many people have lost out because insurance companies have made it too difficult for them to take up their annuity offers.

The issue is the subject of a growing number of complaints to the Financial Ombudsman Service, it has revealed.

Its latest report reveals that among the annuity complaints it receives are a sizeable proportion from people who took out their pension plans between 20 and 35 years ago and have contracts offering guarantees.

Those complaints are often from savers who lost their guaranteed annuity rates when they were advised to transfer their pension to a different provider.

The ombudsman has also dealt with complaints where the individual had not been told their plan had contained annuity guarantees, or where they had lost their entitlement due to strict terms and conditions. They are often buried in the small print of pension contracts, with some pension firms imposing punitive conditions to avoid paying out the generous guaranteed rates.

For instance, the guaranteed rate is sometimes available only if the policyholder retires on a specific day – such as their 60th or 65th birthday. “Always read the small print on your policy schedule, especially plans taken out in the late eighties,” said Tom Munro, owner of Tom Munro Financial Solutions.

“These contracts, usually with-profits, tend to offer the highest guarantees, often between 9 and 12 per cent and almost double the average rate of 5.6 per cent for a 65-year-old retiring today.”

Some insurers claim that almost all policyholders entitled to guaranteed annuity rates take up that option at retirement. At Edinburgh-based firms Standard Life and Scottish Widows the proportion of policyholders exercising their right to a guaranteed rate is close to 100 per cent.

“Virtually all of our 59,000 conventional pension policyholders have a guaranteed annuity rate. We monitor the proportion who take this and it’s always around 99.5 per cent,” a Scottish Widows spokesman said. “Most people still take their 25 per cent tax-free cash so the actual proportion of money taken in GAR format is 75 per cent.”

Yet it’s believed that up to half of savers with certain providers miss out on their guarantee.

“Too often I come across a shocking lack of information obtained from pension schemes, many of whom are not forthcoming with this important information when sending out pre-retirement packs,” said Munro.

Given the value of the guarantees – which becomes greater as annuities continue their long-term downward slide – it’s perhaps no surprise that insurers are so shy when it comes to informing customers of their rights.

There are instances in which the guarantees are less generous than they at first appear, however.

For example, guaranteed annuities are frequently single-life policies with nothing provided for a surviving spouse.

Some also have no inflation link, whereas most financial advisers insist that annuities with some protection against rising prices should almost always be the default choice.

Even if you have the option of a guaranteed rate it’s worth looking at what else is available before you take it up. It may be that an annuity isn’t your best bet, so drawdown (where your fund remains invested in retirement and income taken from it in tranches) could be considered.

If you have health issues or a lifestyle that may impair your life expectancy – such as a smoking habit – then enhanced annuities come into play. These provide higher incomes than normal annuities on the assumption that the payout period will be shorter than average.

“You should always take into account contractual terms as well as other important issues, such as health, and this key issue is often overlooked,” said Munro.

“Getting good advice is crucial, as once purchased annuities are irrevocable.”