Annuity rates have fallen for a decade

Insurance giants such as Norwich Union, Legal & General and Prudential are imposing penalties of up to a quarter of the value of some with-profits pension savers funds.

And, according to a survey by financial adviser Close Wealth Management, some investors are being treated as having agreed to defer buying an annuity - therefore opening themselves up for a penalty - when in fact they had not.

This practice has been dubbed "malpractice" by Close Wealth Management.

Deferred penalty

In most instances, pension savers choose to buy an annuity - in short, an income for life - at age 65.

But pension rules allow investors to defer buying an annuity until age 75.

This is a dangerous precedent... it has potentially far reaching and expensive implications for the individual Martin Smith, Close Wealth Management

Many pension savers have chosen to defer buying an annuity as interest rates and poor stock market performance have meant that at present they will get little income for their pension pot.

They are either gambling that returns will improve or they are able to work beyond age 65 and do not need the income.

But, according to a report from Close Wealth Management, some insurers that learn that a pension saver is not retiring from work at age 65 have automatically set a deferral age of 75.

And if the investor retires and wants to take their pension before aged 75 they have imposed a penalty - sometimes called market value adjuster (MVA) - on the pension fund.

The MVA is meant to apply to a with-profit investment during a time when stock markets are depressed with the aim of protecting the long term performance of the fund.

"This is a dangerous precedent," said Martin Smith, chief executive of Close Wealth Management.

"Although it is a matter of administrative convenience for the insurance company, it has potentially far reaching and expensive implications for the individual."

A spokesman for Norwich Union denied the allegations of malpractice.

He said: "If we were back in 1999 this situation would not have arisen. It's purely down to the exceptional market conditions.