06-06-2025
Pension providers pocket thousands from the dead
Pension providers are pocketing thousands from the dead thanks to old policy contracts that prevent grieving families from inheriting their relatives' full retirement pots.
It is now the norm for pension firms to pay out the total value of an unused pension on death.
But in the 1970s and 1980s, it was common for annuity policies to stipulate that any investment growth would not be passed to relatives if the holder died before retirement age.
Instead, beneficiaries would only receive the value of any contributions paid into the pension, and often a fixed amount of interest on top.
This has led to bereaved relatives losing large chunks of their loved ones' retirement savings because of decades-old policies with often poorly understood terms.
Donna Chuter, 60, received nearly £30,000 less than she was expecting of her late husband Martin's pension after he died aged 63.
Mr Chuter had signed up to a retirement annuity contract (RAC) with Royal London in 1984 after being sold the policy by a door-to-door salesman. He paid into the scheme until 1999.
The value of his pension had grown to £59,670 at the time of his death in December 2024.
Shortly after Mr Chuter died, his wife said Royal London sent her a 'really ambiguous' letter regarding her late husband's pension, which quoted a much lower figure of £30,757.
She added: 'The letter said 'please sign this document'. But it wasn't clear what the £30,000 was – they called it a 'benefit'. I thought it could be a sum on top of the payments into the pension.'
However, when she phoned Royal London to check, she was told that this was the amount of Mr Chuter's pension that she was entitled to.
Ms Chuter was 'absolutely fuming' when she was told she would only receive half the full amount. 'I feel like I've been stripped of £30,000.'
The unexpected shortfall has left Ms Chuter wondering how she will afford her retirement.
She earns just over £1,000 a month working part-time in an administrative role at an accountancy firm, has £20,000 in an Isa and a workplace pension worth £68,000.
But she was relying on her husband's pension to see her through into old age.
'This money has to last me until I die. I won't be able to retire for a long time without the full amount. Martin would have wanted me to be a bit more comfortable. He would be devastated to know I would only get half.'
The Telegraph has seen a copy of the original contract Mr Chuter signed, which states that in the event of death, the policy returns the full amount of contributions paid, plus 4pc compound interest, rather than the policy's full value.
The fact that the full value of the pension would not be paid out on death was also included on Mr Chuter's annual policy statements.
Ms Chuter accepted that Royal London had acted in line with the contract, but questioned whether it was right for pension providers to keep large sums of members' retirement savings.
'It's unethical,' she said. 'If Martin had drawn out the money before he died, he would have got £59,000. Now it's only £30,000. And the letters they sent [after his death] didn't make this clear.'
Retirement Annuity Contracts (RACs) like Mr Chuter's were available before 1988 to individuals who were self-employed, or to those whose employers didn't offer a workplace pension.
They were replaced by more flexible 'personal pensions' which generally entitle beneficiaries to the full pension on death.
However, the accompanying legislation did not force providers to change their terms and conditions on existing RAC policies. And while no new RACs could be opened after this date, contributions into existing RACs could continue.
Industry experts told The Telegraph that Ms Chuter's was not an isolated case, and that many providers besides Royal London also used to offer RACs with similar terms before they were phased out. The policies are becoming rarer as the pension savers they were sold to die.
Jon Greer, head of retirement policy at wealth management firm, Quilter, said it was common for RACs to include a provision that only contributions would be returned if the holder died before their retirement date, not the full fund.
He added: 'Whilst retirement annuity contracts were subject to different legislation [to personal pensions], in this case, the product is entirely a product design choice and not particularly unusual for such contracts.
'It's important that people who have these contracts understand what is provided, as what would have been normal practice then may appear odd when compared to more modern pension arrangements.'
Bertrand Pole, pensions technical specialist at wealth management firm Evelyn Partners, said that while Mr Chuter's policy may seem 'unfair', Royal London was under no obligation to change the terms of the contract in Ms Chuter's favour.
Rachel Vahey, of investment firm AJ Bell, said: 'Many years ago, some pension plans were set up to only return on death the contributions paid in, sometimes with interest added on but sometimes without.
'Fortunately, most of those types of pension plan are a distant memory, and most defined contribution pensions now pay a return of any unused pension pot if someone dies. However, some very old plans may still follow the old rules.'
Ms Vahey urged pension holders to check the small print of their agreements and consider consolidating to a different scheme if terms are unfavourable. Doing so could mean loved ones receive a bigger payout on death, she added.
A Royal London spokesman said: 'We were sorry to hear of Mr Chuter's passing and we have been in communication with Mrs Chuter to explain the detail of the pension policy that Mr Chuter held.
'The policy Mr Chuter took out in 1984 stipulates that, in the event of death, it returns the full amount of contributions paid plus 4pc compound interest, rather than the policy's value.
'The details of the benefits in the event of death were explained in the policy materials provided to Mr Chuter at the time of purchase, and the information was also included in his annual statements thereafter.
'We're committed to providing clear communications to our customers, and we're sorry to hear about Mrs Chuter's experience. We're reviewing our messaging to ensure it reflects the clarity and standards our customers expect.'
