HUNDREDS of thousands of pension savers at Standard Life are being warned that they could face huge penalties, simply because they don’t want to buy an annuity at retirement.

Britain’s fifth-biggest insurer has outraged customers saving into its with-profits pension by threatening to snatch hundreds of thousands of pounds unexpectedly from their funds.

In one case a customer has been told that she will lose £120,000, or 26%, of her retirement pot in penalties for refusing to buy an annuity – where you hand over your pension in return for an income for life.

Advisers say the insurer’s stance flies in the face of the government’s stated ambition to give savers a greater choice at retirement and allow people to retire gradually from full-time employment.

Bob Donaldson of AG Financial Planning, an adviser, said: “People should be able to go into drawdown or one of the more flexible retirement plans that allow them to leave their fund invested without being penalised. This is no way to treat customers fairly.” Standard Life has been imposing the charge, which it calls a unit price adjustment, since November. Insurers often levy a charge on with-profits customers who quit policies early. But Standard Life is the only big insurer to penalise customers on their maturing with-profits pension policies, according to a survey by the financial website Citywire.

Nick Webb at PW White and Partners, another adviser in dispute with the insurer, said: “Penalising someone who has reached a preagreed retirement date is outrageous. The customer has fulfilled their side of the contract and should be entitled to all the benefits that they see fit.”

The charge is being applied to with-profits savers who want to move into a phased retirement plan. These are popular with people who don’t want to see all of their funds disappear into an annuity when they fully or partially retire. You split your pension fund into segments – 1,000 segments is typical – and each year use them to buy an annuity and realise a portion of tax-free cash.

The insurer said it could also impose the fee on customers who move into income drawdown, but don’t take all the tax-free cash they are entitled to. With drawdown, the fund remains invested and you can withdraw an income each year.

Alan Drysdale at Bates Mill-field, an adviser, is battling a £120,000 charge Standard Life imposed on a client who wanted to move her £460,000 fund into a phased retirement scheme.

He said: “She doesn’t need the money immediately and phased retirement is the most suitable option. Annoyingly, even if she moves into Standard Life’s phased plan she will have to pay the penalty.”

Customers who have been caught out are being urged to take the matter further. Peter and Pam White from Amersham in Buckinghamshire are planning to take their case to the Financial Ombudsman Service.

Both wanted to move into a phased retirement plan when they reached 65: Peter in November and Pam earlier this year. Standard Life has told them that they could lose £8,000 of their joint pension pot of just over £200,000 if they carry out this plan, leaving them angry and uncertain about what to do.

Peter said: “If I had known about these penalties I would have transferred to another provider several years ago. This would have enabled us to make up any exit charges imposed at that time. What really sticks in the throat is that Standard Life introduced the fee just as I was approaching my retirement date, by which time it was too late.” You must complain to Standard Life before you go to the ombudsman with your grounds for complaint.

The insurer argues the penalties are fair. Patricia Corrigan at Standard Life said: “These policies were set up for people to save for a pension. We never pay less than the fair value of a policy, which is based on the value of the underlying investments.”

Investors approaching retirement are also being urged to check whether their policies have a valuable guaranteed annuity rate because it could boost their retirement income by thousands of pounds a year.

Gars provide a retirement income up to 40% higher than a standard annuity, but many people don’t even realise their policy comes with a guarantee and insurers are often slow to point it out.

The Sunday Times was contacted by one reader last week who has a maturing pension with NPI, now owned by Pearl. He was quoted an annuity rate of 6.2%.

He queried this as he had noticed that the policy had a guaranteed rate of 8.2%, but was initially told that Pearl policies do not have Gars. It was only when he disputed this that it was finally agreed that his policy did come with a guarantee.

Gars can in some cases be worth more than 10% a year. They were sold mainly in the 1970s and 1980s, usually alongside with-profits retirement annuity contracts, the forerunners of personal pensions.

Jarrod Parker at Alexander Forbes, an adviser, said: “Many pensions which have been around for 15 years or more come with a Gar. Some insurers do not make this clear. Even when they do, it is often difficult to understand what you are being offered.”

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