Savers warned over another annuity scandal

The annuities bought automatically were also often of a type inappropriate to the customer’s circumstances and invariably paid less than would have been available on the open market.

But it has now emerged that the money generated by these annuities may never be claimed by the policyholders or their families and instead is simply kept by the insurers.

Ros Altmann (pictured), the Government’s “tsar” for older people, said: “Automatic annuity purchase is written into the terms of some pension contracts, which specify that it will happen on a particular date, usually the date at which the policyholder expected to retire at the time the contract was signed. But the policyholder can prevent the purchase by contacting the company beforehand and requesting another course of action, such as keeping the policy going or transferring to another provider.

“However, if the company has lost touch with the customer, who may have changed their address, it will go ahead with the annuity purchase.” The income payments will accumulate in a holding account and will be distributed to the customer if he or she gets in touch.

But Ms Altmann added: “If contact with the customer is never made, this money will eventually be pocketed by the company.”

She said firms were not obliged to try to find customers and Alan Higham of Fidelity, which runs a pensions advisory service, said: “I have not heard of any pension firms that try to trace policyholders who they have lost contact with.”

Crucially, Ms Altmann said the believed while pension funds that had not been used to buy an annuity could be claimed by a policyholder’s descendants, the accumulated proceeds of an annuity could not.

“It wouldn’t be part of the deceased’s estate because it has effectively been used to purchase an annuity – which dies when he does,” she said.

Ms Altmann called for the practice of automatic annuity purchase to be banned immediately, saying that it was particularly objectionable in light of next year’s pensions reforms. Under changes announced in the Budget in March this year, savers will be allowed unrestricted access to the money in their pensions from next April – as long as it has not already been turned into an income via an annuity.

“If there was no automatic annuity purchase the customer could always come along later and take their money out,” she said. “But once the annuity is bought they can’t undo it in future. In light of the Chancellor’s Budget changes I believe these automatic annuities should be banned immediately.

Mr Higham said: “It is highly unlikely that a customer defaulted into an annuity will both get the right type of contract and the best rate. This is an abhorrent practice which must be curtailed.”

A number of companies are believed to have automatic annuity purchase written into the policy terms and conditions, including Abbey Life.

A spokesman for Abbey Life said: “A number of our pension products have a default arrangement for converting the retirement fund to income at the customer’s originally selected retirement date. Abbey Life is required to comply with these terms and conditions and will automatically invest where the customer has not selected an alternative retirement option. Abbey Life has a contractual obligation to do so.”

What happens to forgotten assets?

Money in bank and building society accounts that lies unclaimed is eventually transferred to the Big Lottery Fund to fund good causes, although customers who come forward later can still reclaim their money. Accounts are regarded as dormant when they have not had any customer-initiated activity for more than 15 years. A company called Reclaim Fund receives the dormant money, meets any reclaims and passes on the surplus for reinvestment in the community through the Big Lottery Fund. By October last year, £600m had been transferred by banks and building societies to the Reclaim Fund, which in turn transferred more than £180m to the Big Lottery Fund by the end of 2013.

But unclaimed money held by pension firms, which is estimated to total hundreds of millions of pounds, does not come under this scheme. If you think you may have money with a pension firm that has lost track of you, first write to it. You can also try the Pensions Advisory Service (0845 601 2923, pensionsadvisoryservice.org.uk) or the Unclaimed Assets Register (0870 241 1713, uar.co.uk).

How to best take advantage of the new pension freedoms: see the updates in our weekly round-up

richard.evans@telegraph.co.uk

more