Millions face new pension scandal

Almost 2.5 million people risk becoming victims of a new pensions mis- selling scandal because of a "badly drafted" section of the new Pensions Act.

Those most at risk have opted out of their state earnings-related pension scheme (Serps) and have a rebate paid annually by the Government into a personal pension plan instead. No other contributions are made to the scheme.

A clause in the Pensions Act, introduced last year, forces insurance companies to offer a special type of option, called income withdrawal or deferred annuity purchase, to all those with a "rebate-only" pension who are about to retire. In return for giving up an immediate right to a guaranteed, but lower, annual income they can draw down larger payments until the age of 75.

If the larger payments are drawn down until that age and investment performance is poor, pensioners would only be left a small pot of capital to buy an annuity to top-up the basic state pension.

Insurance companies believe that unscrupulous salespeople could mis-sell such schemes to people who want higher payments immediately when they retire, without advising them of the dangers.

The Association of British Insurers, the industry's trade body, is so concerned that it is lobbying the Government in the hope of winning a change in the law.

One insurance executive, who would not be named, said: "What worries me is that while most of us will be scrupulous, it only takes a few to create mayhem. Even 1 per cent of mis-sold policies could lead to tens of thousands of cases over the years. Unless we act now, we could be talking several times that number."

The new-style deferred annuity pension was given the go-ahead by the Government in November 1994.

Instead of buying an annuity - a guaranteed annual income - pensioners use a slice of their total pension fund to live on. The rest of their fund continues to be invested and is expected to grow faster than the cash draw-down.

If investment performance is poor, however, the value of the fund could shrink at the time when people need it most.