What is an annuity

An annuity is a type of financial product that is purchased to provide an income in retirement. The person approaching retirement will “swap” their pension pot with an annuity firm in exchange for a guaranteed income for the rest of their life. If a person lives longer than anticipated, this can work in their favour as they’ll continuing receiving their income which may eventually exceed the money they used to purchase the annuity. Likewise, if they pass away earlier than expected, the annuity provider may keep the remainder of the pension pot. In some circumstances you can opt for a “guarantee” period which ensures the agreed income will continue to be paid to your estate for the agreed period of time regardless of your passing. There are lots of extra options/benefits you can add to your annuity, but these usually decrease your income.

The bigger the pension pot, the higher the income. Annuity providers offer a range of options and different rates, it is always advised to shop around the “open market” in pursuit of the best product for you.

How can an annuity be mis-sold?

Following an investigation by the Financial Conduct Authority into annuity sales practices, it was revealed that almost 200,000 pensioners in poor health would be compensated by two of Britain’s biggest pension firms after being mis-sold annuities which were designed for healthy people. A customer with impaired health is more likely to die sooner than a healthy customer, and so would expect to have their pension pot shared over a shorter period of time, which in turn means their income should be higher. This is called an enhanced annuity.

Savers with health issues such as diabetes or angina missed out on a substantial portion of their retirement income as a result of the mis-selling. Annuity mis-selling occurs when a customer is sold an inappropriate financial product for their circumstances or they’re not given an appropriate amount of information before they purchase an annuity.

There is also the “Open Market Option” a phrase used to explain the process of shopping around for better rates as you would for other insurance products. An annuity has such an important impact on your life, it is incredibly important you are given the opportunity to search other providers for a better product to provide a larger income than your existing pension provider. When advising on pensions and annuities, regulated organisations must ensure they are clearly promoting the option of shopping around to for a better rate. Failure to do so is a breach of regulatory obligations.

How much can I claim?

Although the FCA refused to reveal the names of the companies it was investigating, the regulator estimated that the average customer with a pension pot of £25,000 would have lost between £120 and £240 in annual payments. Over the course of a typical 25-year retirement, this would equate to £6,000, although losses due to annuity mis-selling could be in the tens of thousands.

A mis-sold annuity can make a substantial difference to the pension pot of the person involved, sometimes seeing them adopt a different lifestyle than they would have enjoyed had they received the correct annuity for them.

How do I know if I’ve been mis-sold an annuity?

There are many signs that you may have been mis-sold an annuity. If you can identify with any of the following, this may indicate that you’re entitled to compensation.

  • Your health and lifestyle choices weren’t taken into account

    Annuity providers tailor their pension products to take the customer’s life expectancy into account. If you suffer from a health condition that could impact your life expectancy, this needs to be taken into consideration. Failure to factor this into your annuity product could see you receiving less money each month than you’re entitled to. This is because the annuity will spread the money you’ve saved for retirement over a longer period of time than you are likely to live. The same can be said if you are a smoker, or drink excessive units of alcohol.

  • You weren’t provided with a range of options

    When seeking financial advice, some people are encouraged to purchase a particular annuity without having seen other options first. Although it’s perfectly acceptable for your financial advisor to point you in the direction of the best deal for you, they should ultimately give you a selection of annuities to choose from. If your advisor fails to do this, they may be guilty of mis-selling.

  • You weren’t made aware of hidden charges

    If you select a particular annuity only to uncover hidden charges at a later date, you may have fallen victim to financial mis-selling if your advisor failed to notify you of these charges.