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An annuity is the technical term for the annual income paid by a product provider to someone who has taken out a pension.
There are many different types of annuity available. The most basic annuity is based on the life expectancy of just one “annuitant” only – and when that person dies, the annuity payments stop. Alternatively, consumers can choose an annuity that will provide a proportion of the income to their partner or dependants when they die.
Consumers can also choose either to have a fixed income or an annuity that increases each year.
While some consumers arrange their annuities themselves, others choose to get independent financial advice to make sure they get the annuity that best meets their needs.
We see a variety of different complaints relating to annuities. The complaints are often about the advice a consumer received about which annuity is most suitable for them – or about the administration of their annuity.
The level of income that a provider will pay to a consumer – usually known as the “annuity rate” – depends on a number of different factors, including the consumer’s age, state of health and life expectancy, and whether they want a single or joint policy. It also depends on a number of economic factors, including interest rates.
Some consumers are telling us that they are being offered a much lower level of income from their pension plans than they had expected. This is a result of life expectancies improving significantly, consistently low interest rates in recent years, and fund values turning out to be significantly less than originally projected,.
In many cases these people took out pension plans in the 1980s and 1990s, when interest rates were much higher. The plans offered guaranteed annuity rates that are significantly higher than rates currently being offered on the open market. These plans also usually have specific conditions about when the guaranteed rates may be available.
Our online technical resource contains more information about annuities and how they work – as well as setting out our approach to the cases we see. We will look at the circumstances of each case –taking into account any relevant regulatory requirements, as well as the law and good industry practice at the time the annuity was taken out.
We often see similar issues in the annuity complaints we receive. Some of the more common ones are:
The case studies that follow illustrate some of these situations.
When Ms G received her annual tax calculation for 2012/2013, she was surprised to see that she had paid extra tax relating to an adjustment for a previous year – 2009/2010. She wrote to HM Revenue and Customs (HMRC) to say that her income in 2009/2010 had been less than their statement suggested – and that she should have been taxed at a lower rate. HMRC replied, saying that Ms G's annuity provider had given them the higher figure for 2009/2010.
Since her divorce, Ms G had received a proportion of the total amount of the annuity in question – which was held in her ex-husband’s name. Her income from it had been the same in the years before and after 2009/2010 – and she couldn’t understand why that particular year should be any different. She found that the last P60 she had in her personal records was for 2008/2009. So she contacted the business to find out why the discrepancy had arisen – and to ask for her missing P60s so she could check the numbers herself.
However, the business insisted that they had submitted the right amount to HMRC for 2009/2010. They apologised for the missing P60s – and said that they had sent them to Ms G’s ex-husband – because the annuity was in his name. But although they reassured her that it wouldn’t happen again, they said they couldn’t now reissue Ms G’s historic P60s.
Ms G was unhappy with this response, and she complained to the business. When they rejected her complaint, she referred the matter to us.
Ms G told us that as a single pensioner, she kept a close eye on her finances. She provided us with her bank statements for the years since her divorce. Having looked at these we were satisfied that she had received the same amount of income from the annuity every month.
When we asked the business to explain their position, they told us that they had taken over the administration of the annuity in January 2010. The previous administrator had made payments to Ms G’s bank account on the 24th of each month. However, the business made their payments on the first of each month – meaning that in that particular tax year, Ms G had received an extra payment. So the total the business submitted to HMRC was higher than usual in 2009/2010. The confusion had arisen because Ms G was adding up the 12 payments she thought she had received – rather than the 13 she had actually received.
We accepted the business’s explanation – and that they had provided HMRC with the correct figure. However, we noted that in their response to Ms G’s complaint, the business hadn’t made any attempt to explain the situation to her. And we found no evidence that they had informed Ms G in 2010 that her payment date was changing – or the effect that this might have.
Ms G also told us that she had already raised the issue of her P60s being sent to her ex-husband a few years earlier. When we looked into this further, we found that the business had never sorted the problem out – and it had continued to happen.
In our view, the business had addressed Ms G’s concerns very poorly – both this time and in previous years. We told them to pay her £300 for the inconvenience they had caused her. We also told them to make sure that Ms G’s P60s were sent to her directly from now on.
When Mr H was diagnosed with terminal lung cancer, he decided to take his pension early. He got in touch with his pension provider – and, shortly afterwards, received some information in the post about his annuity options.
Mr H read through the information and chose the annuity that he understood would allow him to take a tax-free lump sum. Sadly, Mr H died two years later.
When Mrs H phoned the annuity provider to let them know about her husband’s death, she was told that her pension would stop after the annuity’s “guaranteed period” (a protected period where, if someone dies shortly after taking out an annuity, payments will still be made). This meant she had three years’ worth of payments left – but would receive nothing after that.
Mrs H made a complaint. She said that, on the basis of the information the business had given them, she and Mr H had believed she would receive an income from the annuity for as long as she lived. She insisted that Mr H would never knowingly have chosen an annuity where that wasn’t the case.
The business expressed their condolences for Mrs H’s loss. But they explained that in the signed documents Mr H had returned to them, there had been no indication that a spouse’s pension was required. They also pointed out that the amount payable under a “single-life” annuity was greater than that of “joint-life” annuity – and Mr and Mr H had benefited from this higher income.
Upset and frustrated by this response, Mrs H asked us to step in.
We asked the business to send us a copy of the “maturity pack” they had sent Mr H when he had told them he wanted to take his pension.
found that the documents presented only two quotes – neither of which included a spouse’s pension. The only difference between them was that one included the option to take a tax-free lump sum, while the other did not. However, immediately beneath the quotes was the paragraph: “Your spouse’s pension is payable to your surviving spouse on your death after retirement. If you have chosen a guaranteed period and you die within this period your pension will continue to be paid to your estate/next of kin for the remainder of this period. Your spouse’s pension will not start until the guaranteed period has ended.”
We thought that saying this underneath a quote for a single-life annuity was very confusing – and was likely to lead someone to believe a spouse’s pension was included in the quote.
Next, we checked the documents to see how they said a spouse’s pension could be bought. Eventually – in the third of four sections – we found a very technical paragraph about this being one of several situations where it might be necessary to obtain further quotes.
We took the view that the business should have appreciated that Mr H – like the majority of people in his position – was not a pensions expert. So he would have been looking to rely on the information the business had given him to make a decision. We felt that information had been presented in a misleading way – that could lead a consumer to believe they were buying a joint-life annuity.
So we upheld Mrs H’s complaint. We explained to her that the business had been right to say that the monthly income Mr H had received from his single-life annuity was higher than that he would have received from a joint-life annuity. This was because a joint-life annuity would probably be paid for a longer period of time.
Mrs H provided us with evidence to show that she had put the tax-free lump-sum towards Mr H’s funeral – and receipts to show her living expenses. We referred the business to the principle established by R v ICS ex parte Bowden. And we told them that, in the circumstances, we didn’t feel that any compensation due to Mrs H should be affected by her and Mr H’s previous income.
We thought that, had Mr H received clear information, he would have chosen an annuity to provide for him and his wife until they both died. We told the business to pay Mrs H a pension for the rest of her life – at the level that would have applied if Mr H had chosen a joint-life annuity.
When Mr L entered into a pension plan in the late 1980s, he chose to take out a guaranteed annuity rate – a “GAR” – to fix the minimum income he would receive from the annuity he would buy when he retired.
Mr L chose to retire in 2011, aged 65. However, he was surprised to find that the annuity rate available to him was less than the one he thought he had fixed – and had been expecting.
When Mr L raised the issue with the business providing his pension, they explained that when he first took out the GAR, he had set the maturity date as his 75th birthday. The rate he fixed would have been payable if he had retired after that date – but not at any point before then.
Disappointed with the annuity rates now available to him, Mr L complained. He said he felt that the information the business had given over the years had been misleading. For example, he said, his financial adviser had been told by the business that the GAR would be lost if he transferred his policy before his “selected retirement date” – not the maturity date. And he had always planned to retire at 65. Mr L also pointed out that the policy documents said that benefits could be taken any time between the ages of 60 and 75.
When the business rejected his complaint, Mr L asked us to look into it.
complaint not upheld
We asked to see the terms and conditions of Mr L’s GAR policy. We found that the policy’s maturity date – Mr L’s 75th birthday in 2021 – was shown prominently. And in the first section, there was an explanation that the GAR would be paid on this date.
We noted that the terms and conditions also gave details of the “temporary assurance policy” that Mr L had taken out with his pension. This was set to expire on Mr L’s 65th birthday in 2011. We thought it was possible that he had confused the two dates. However, in our view, information about the GAR and the life cover were set out clearly and separately.
We asked the business to provide any correspondence that they had sent Mr L since his pension plan started. We found that Mr L had been sent yearly “anniversary certificates” – each stating that the policy would mature on the date of his 75th birthday.
On another occasion, Mr L’s financial adviser had been provided with a table showing the different annuity rates that would apply for retirement ages between 60 and 75.
Mr L showed us the letter to his financial adviser that he had referred to in his complaint. In this, the business had said: “your client’s policy has a Guaranteed Annuity Rate (GAR). If they proceed with transferring their policy before their selected retirement date, they will lose the GAR available under their policy.”
We appreciated that the policy’s maturity date and Mr L’s preferred retirement date didn’t align. And we were sorry that he was so disappointed. But we decided that it was clear from the terms and conditions – and subsequent correspondence to Mr L’s financial adviser – that the GAR would not be available before his 75th birthday. We did not uphold the complaint.
In 2006, Mr B read a feature on annuities in his Sunday paper. The article explained that, because of recent changes to legislation, it was now possible to buy an annuity when you were aged 55 – rather than 60. And that as annuity rates were likely to fall in the near future, this was an option worth considering.
Mr B was 56 at the time. He ran his own plumbing business, but had recently been considering selling up. Prompted by the feature, he got in touch with his financial adviser to talk about his pension arrangements – especially whether it would be a good idea to buy an annuity. After discussing his circumstances with the adviser, Mr B took 25% of his pension fund as a lump sum – and bought an annuity for himself and his wife, Mrs B, with the remainder.
In 2012, Mr B was talking to a friend who was having problems with his pension. Mr B began to wonder whether he had done the right thing by not keeping his pension until he was 60. He got in touch with his financial adviser to ask whether he would have been better off if he hadn’t taken the lump sum and bought the annuity when he had.
The financial adviser talked through the details of the pension with Mr B. But Mr B was very unhappy with what he was being told, and he complained to the business. He said that he hadn’t been told that a good guaranteed annuity rate (GAR) would have been available to him if he had kept his pension until he was 60. Mr B felt that if this benefit had been explained to him, he wouldn’t have bought an annuity when he did. He said the adviser knew about his savings – and that he could have easily lived off them until he turned 60.
However, the business stood by their advice. They explained that a GAR would only have been available with a “single-life” annuity. They pointed out that Mr B had made it clear that he wanted his wife to be provided for – which meant that a “joint-life” annuity had been more appropriate for his needs. They said that Mr B had signed a declaration to confirm that he understood the benefits he would be giving up. Finally, they pointed out that because Mr B had said he planned to sell his business, the adviser had judged that he would need the income from an annuity.
But Mr B was still unhappy with the situation, and he asked us to step in.
When we asked the business to show us the point-of-sale documentation from their meeting with Mr B, they told us that this wasn’t available. That meant we couldn’t consider the notes the adviser had made about Mr B’s circumstances.
We asked Mr B to describe his situation in 2006. He said that he and Mrs B had both planned to retire around the age of 60. Mrs B had a small private pension. And they each had around £30,000 savings.
We also asked the business to provide us with details of Mr B’s pension plan. We saw that he would have received a GAR of 9% if he had retired at 60 – increasing to nearly 16% by 75. If Mr B had contributed to his pension until he turned 60, his yearly income from it would have been nearly £2,000 higher than if he had stopped contributing. And his lump sum would have been more than £6,000 higher.
We looked at the letter that Mr B had signed – when he had confirmed that the GAR had been “pointed out” to him. However, we noted that this didn’t give details of the level of the GAR. We felt that the letter should have set out more clearly – in numbers – the benefits that Mr B was giving up.
And although Mr B confirmed to us that he had been considering selling his business in 2006, he didn’t actually do this until 2011 – aged 59. We thought the business could have postponed their advice until that point. But there was no evidence that the adviser had explained to Mr B that – because of the GAR – his annuity wouldn’t be affected by the falling rates the newspaper predicted.
In light of Mr and Mrs B’s level of savings – and the fact Mrs B had her own pension – we decided that Mr B would have been better advised to carry on paying into his pension until he was 60. He could have lived off his savings in the meantime. And when he did buy an annuity, the financial benefit of the GAR could have funded a further income for Mrs B.
We upheld the complaint. We told the business to put Mr B in the position he would be in he had received appropriate advice – and bought an annuity, aged 60, with a GAR.
In November Mrs H decided that she would like to retire at the end of the following year. Before she spoke to her employer to let them know about her plans, she had a brief chat with a financial adviser to find out more about her pension arrangements. The business filled her in on annuities and how she could go about getting one. A week later, Mrs H told her employer that she planned to retire – and she got back in touch with the financial adviser to sort out buying an annuity.
Mrs H went to meet the financial adviser and talked through her personal circumstances. She said she planned to sell her home and move closer to her elderly parents. She explained that she didn’t have much in cash savings, but that she had other policies in place that would mature soon.
The financial adviser also asked Mrs H about her attitude to risk – and noted that it was “balanced”. Mrs H said that she wanted a flexible income, but one that was not influenced by investment returns.
On the basis of this conversation, Mrs H decided to take out a fixed-term annuity. Getting the annuity in place involved four parties: Mrs H, her financial adviser, her pension provider and the annuities provider. The relevant forms were sent to the annuity provider, who passed them onto the pension provider. At this point, the forms were forwarded on to an incorrect address. They were received roughly a week later than the date they were expected to arrive. After this, there were other delays as various forms were circulated between the parties to finalise the sale of the annuity.
When the annuity was finally in place, Mrs H noticed that the value of her fund had decreased during the time it had taken to set it up. Unhappy with the situation, Mrs H wasn’t sure who to go to, so she complained to her financial adviser. When her complaint was rejected, she asked us to step in.
We contacted the various parties to the complaint and investigated the length of time it had taken to set up the annuity. However, although we took the view that everyone involved could have acted slightly more quickly, the overall time it had taken was not unusual for an annuity. So we were satisfied that any slight delays were not wholly the fault of the financial adviser – and in any case, we didn’t think the delays were unreasonable.
However, when we checked the “fact find” from Mrs H’s meeting with her adviser, we noted that there had been no discussion of temporarily moving her money into a cash or deposit-based fund to make sure the value stayed the same. Her fund had lost value because of market factors – and this wouldn’t have happened if her money had been moved into a cash or deposit fund.
We asked Mrs H whether she remembered this option being discussed, and she said that she didn’t. The financial adviser told us that this would have been discussed, but we couldn’t see any evidence to show that it had.
In these circumstances, we took the view that Mrs H would have wanted to receive the maximum benefit from her annuity – and that she would probably have taken the option to protect her money if it had been given to her.
So although we couldn’t see that the adviser had caused any unreasonable delays, we thought they could have done more to help Mrs H protect her money. So we told them to put Mrs H into the position she would be in now, had her money been transferred into a cash fund while her annuity was put in place.
Mr J was about to retire, and he contacted a financial adviser to sort out buying an annuity. Mr J got everything arranged, and just before the annuity was due to start paying out, he received a letter setting out the various amounts he would receive. The letter said that Mr J would receive a lump sum and a monthly payment. The payments started the following month.
Two years later Mr J had a meeting with his financial adviser. The adviser had noticed that the payments Mr J had been receiving were much larger than they should have been. So the adviser got in touch with the annuity provider to ask them to investigate.
It soon became apparent that the business had made a mistake, and had been overpaying Mr J by a considerable sum of money each month. The business had overpaid by more than £40,000 in just two years. To begin with, the business asked Mr J to send them a cheque for the total amount. But after a conversation with his financial adviser, Mr J offered to repay a quarter of the total in a lump sum, followed by instalments each month for five years.
The business was willing to accept the lump sum, but said that the monthly instalments would have to be higher. As an additional compromise, and because they had made the mistake in the first place, the business offered write to off just over 10% of the total amount.
But Mr J wasn’t happy with the business’s proposal, and he complained. He pointed out that he was almost 65, that his health wasn’t good, and that his wife’s job wasn’t secure. He said he was unwilling to enter into an agreement that might turn out to be beyond his means in the future. Mr J’s adviser also thought that the business should be more lenient – because he and Mr J had pointed out the mistake.
When the business refused to reconsider its offer, Mr J asked us to look into his situation.
complaint not upheld
We noted that Mr J had received a letter a month before the payments were due to start – setting out what those payments would be. We were satisfied that the overpayments Mr J had been receiving were significant enough that he should have noticed fairly quickly that something was wrong. We took the view that if Mr J had alerted the business to the problem straight away, he would not have found himself in the position he was in.
In these circumstances we thought it was fair for the business to ask Mr J to pay the money back, and we took the view that the business’s offer to reduce the amount by around 10% was fair.
Although we understood that Mr and Mrs J were concerned about what might happen in the future, and we sympathised with their position, we did not think the business had brought about or exacerbated their concerns.
Taking everything into account, we thought the business had acted fairly and we did not uphold the complaint.
Mrs S’s husband, Mr S, had been receiving his annuity payments without any trouble for a number of years. When Mr S died in 2010, the annuity reverted to Mrs S and she started receiving the money directly. Two years later Mrs S got a letter from HM Revenue and Customs (HMRC) saying that she owed just over £2,000 in tax. The letter said that tax had been underpaid for four years between 2007 and 2011.
Mrs S was surprised, because as far as she and her husband had been concerned, the tax ought to have been dealt with by the business providing the pension. So she got in touch with them to ask what was going on.
The business told Mrs S that they “had not received the correct tax code for her annuity until 2012” – but they had applied it to her policy the day they received it.
Mrs S felt that tax codes were a matter for the business and for HMRC. She complained to the business, saying that they should pay the tax bill. When the business refused, and rejected her complaint, Mrs S asked us to step in.
complaint not upheld
We got in touch with the business, who told us that they had received new tax codes each year from HMRC, but that they had sent the wrong policy numbers each time. So every time, their automated systems had returned the tax codes to HMRC, stating that the code had not been applied. The business also pointed out that HMRC had sent P46 and P60s that did have the right policy numbers on them – which showed that HMRC did have access to the right policy numbers and income information.
We checked the business’s records and noted that they had applied the correct tax code – for the right policy – on the same day that they received it from HMRC. So we were happy that the business hadn’t done anything wrong.
We took the view that it would be up to HMRC to provide revised tax codes when it was told that it had sent the wrong policy numbers with the codes.
We could understand why Mrs S was unhappy, because the tax underpayment was not her fault. But ultimately, it was not the business’s fault either. And although Mrs S would not have paid the tax in a lump sum if the mistake hadn’t happened, she still would have had to pay the tax.
In these circumstances, we did not uphold the complaint.
Mr D was due to retire in 2003. Six months earlier, he decided to look into annuities. He did some research on his own, and then approached an annuity provider. The business gave him some information so he could choose the right one. Mr D asked for the annuity to be set up and everything went through smoothly.
Sadly, Mr D died eight years later. His wife, Mrs D, noticed that the payments for the annuity were still being made to Mr D’s estate. But two years later those payments stopped. Mrs D was confused, because she and her late husband had thought that Mrs D would still receive Mr D’s pension payments until her death. Mrs D got in touch with the business to find out what was happening.
The business told Mrs D that her husband had “purchased a single-life annuity rather than a joint-life annuity”. They explained to her that she was not part of the contract, so she was “unable to draw a spouse’s pension from Mr D’s fund”.
Mrs D was not happy about this. She complained to the business. She said she had thought that it was a joint fund. She also pointed out that the money she and her husband had received over the years was considerably less than Mr D had paid to set up the annuity. Mrs D also said she couldn’t understand why the business had carried on paying out for two years after Mr D’s death – if the payments were supposed to have stopped.
When the business rejected her complaint, Mrs D asked for our help.
complaint not upheld
We needed to see what information Mr D had been given to help him choose the annuity that he had bought. The business supplied copies of what Mr D would have been shown, as well as copies of the forms and contracts that he had signed.
We noted that Mr D had been given information, but that nobody had suggested what would be “best” for him. We also noted that the forms and information set out clearly the different options for single or joint-life annuities. The information was set out clearly and was not misleading. So we thought that Mr D would probably have been aware of the limitations of the annuity he had chosen.
However, we could see why Mrs D might have been confused when the payments continued after Mr D’s death. We explained to Mrs D that the single-life annuity that Mr D took out came with a ten-year guarantee. This meant that if Mr D died within ten years of taking out the policy, the business would continue to pay to his estate. So the payments had lasted for ten years, and then stopped.
We also explained to Mrs D that annuities don’t work like bank accounts. When Mr D died, the money that the annuity hadn’t yet paid out didn’t become a “balance” – and wasn’t money that Mrs D was entitled to receive.
We sympathised with Mrs D’s situation, but we decided that the business hadn’t acted unfairly in this case.
ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.
The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.