An annuity is a policy providing a monthly income for life. When a person retires they buy an annuity once they have taken their pension fund.
The monthly income provided by the annuity depends on a number of things:
1) How much money is being used to buy the annuity? (All things being equal the larger the amounts paid in, the larger the monthly income.)
2) How old is the person buying the annuity? A younger person will receive less money per month than an older person due to their life expectancy.
3) Insurance companies will also consider the health and well-being of the person taking out the insurance and this will affect the annuity payments.
If the amounts of income you are receiving from your annuity is less than it would’ve been if you had been sold the correct annuity. You are entitled to claim the difference back. The calculation always depends on the facts of the case but the following examples are a good guide
Mr X has a pension fund of £100k and is sold an annuity which provides £4,000 each year. Had it been noted that he is a lifelong smoker and suffers from high blood pressure, he could have taken a different annuity and received £8,000 per year if this had been taken into account. Over a 10 year period, Mr X has lost the income of £40,000.
Mr Y has a pension fund of £75k and is sold an annuity directly by his pension provider. This provides an income of £3000 per year. He was not informed of his right to go to the open market for a better rate of income. He could have obtained an income of £4000 per year had he gone elsewhere. Over a 15 year period, Mr Y will lose £15,000 of income.
Mrs Z has to take daily medication for a diabetic condition. Her annuity provider did not ask her anything about her medical conditions and this gives her an income of £300 per month for her pension fund of £75k. Mrs Z could have obtained an income of £450 per month if her medical history had been taken into account. She is £150 per month worse off as a result and in 10 years would lose the total income of £18,000.