Annuity delays can cost up to £10,000

Pension savers risk losing out on as much as £10,000 because of delays in transferring funds into retirement income, Virgin Money warns. Its warning comes after the Financial Services Authority revealed six out of 10 customers converting pension funds into annuities faced delays in receiving their payout.

Delays in processing annuity transfers hit pensioners on two fronts - the loss from payouts not starting on time and a potentially bigger loss from annuity rates dropping during any delay in sorting out paperwork.

On a £100,000 fund a 65-year-old man retiring today could expect an income of around £7,740 a year or £645 a month. Every month the pension provider delays paying out he would lose the monthly income with a three-month delay depriving him of £1,935.

For a 65-year-old woman the payout would be £7,320 on a £100,000 fund with a monthly income of £610. A three-month delay would cost over £1,800.

However if annuity rates dropped 0.5 per cent during the transfer period to 7.24% for men and 6.82% for women the annual payout would fall by around £500 a year to £7,240 a year for the man and £6,820 for the woman. The payout would be fixed for life with the result that over 20 years in retirement losses would soar to £10,000.

Annuity rates are currently at a six-year high as the ongoing credit crunch means yields on bonds and Government gilts have increased and in turn boosted annuity rates. However annuity rates do change month by month and the possibility of cuts in UK interest rates may push them lower.

Virgin Money pledges to send out maturity forms to its pension customers within five working days when they request an annuity transfer form and to send a cheque to the annuity provider within a day once the customer returns the forms.

Spokesperson Scott Mowbray said: "Buying an annuity is a one-off decision and one which retired people have to literally live with. With a fixed annuity the income you receive is fixed for life so the losses from delays are also fixed for life. There's no second chance.

"The financial services industry should be doing everything possible to make the transfer process as smooth as possible so customers receive the best possible payout. The risk of losing thousands of pounds for life is a genuine threat.

"Pension providers have to improve their transfer times and the FSA is to be congratulated on its work although clearly more needs to be done."

The FSA research into annuity delays in July found that out of 238 cases reviewed more than 60 per cent suffered delays due to complexity, confusion and paperwork.

It also showed that in four out of 10 so-called ‘Wake Up Packs' the Open Market Option sent to savers by insurers before retirement, was not explained properly with the result that savers failed to shop around rival firms for the best rate.