Is this the worst pension mis-selling case ever? Aviva knew this customer was ill

Britain’s biggest insurer knowingly sold an annuity designed for healthy individuals to a customer whose health was poor, Telegraph Money can reveal.

This is among the worst of the many annuity mis-selling cases unearthed in the course of our campaign to date.

While the majority of mis-selling appears to have arisen because insurers failed to ask customers for appropriate information about their health, in this case Aviva staff were fully aware of the poor health of the saver – yet even so sold her an annuity which would have resulted in her receiving too little income for life.

In a significant victory for our campaign Aviva has now admitted this mis-selling and has agreed compensation.

The customer, pictured above, who has chosen not to be named, told Aviva at the time of her annuity purchase that she suffered from a catalogue of chronic health conditions.

Had she been sold an annuity which paid an enhanced rate in recognition of her likely earlier death, she would have been thousands of pounds better off.

Her case could carve the path for scores of other mis-selling victims to claim redress.

After reading about the emerging scandal in these pages late last year, she complained to Aviva in January. She involved her local MP who agreed to write to the firm on her behalf. But Aviva fobbed her off and ultimately rejected her case.

• Savers to be told if their annuity is a rip-off

It was only after Telegraph Money’s resident consumer champion, Jessica Gorst-Williams, probed further into her case that Aviva was forced to admit it was at fault.

The customer had a number of health conditions. These included pseudomonas, a lung condition which causes respiratory problems and other unpleasant symptoms, holes in her lungs (called bronchiectasis), a mild form of cystic fibrosis and hypertension.

Jessica established that Aviva already had details of these health problems on its files at the time the annuity was sold. This was because our reader had already applied for ill health benefits in 2006.

When the customer finally took her annuity in 2009, she asked again for an enhanced rate owing to her illness, but Aviva refused and sold her an ordinary policy instead. The customer received no financial advice – meaning she would have been reliant on Aviva’s generic “wake up” pack and other communications to outline her various retirement options.

Aviva has now agreed to compensate the customer for her losses, a sum which it calculates to be £2,344.32, plus £69.02 in interest. It will also increase her future income by 11pc per year.

It has arrived at this higher income by rewriting her annuity, taking into account the health conditions she had at the time. The compensation it has offered is based on the difference between the original quote and what Aviva would have offered her at the time, had her health been correctly taken into account.

• Mis-sold annuities: savers to get thousands in official compensation plan

Lawyers say that if taken to court, mis-selling victims in cases such as this could expect to win claims for the difference between their original quote and the best enhanced deal they could have found on the open market at the time.

Historic data shows that if Aviva had based her compensation claim on the best rate then available from any insurer, her redress would be worth three times as much at £6,932.

Further to this, the interest Aviva has applied to her compensation, at Bank rate plus 1pc, is below the recommended 8pc the Financial Services Ombudsman (FOS) and the courts award to people in these circumstances. This has further reduced her payout.

Lawyers at BT3, a pension firm established to represent annuity mis-selling victims, said that if taken to court or to the FOS, this customer could expect to be awarded 8pc interest on her compensation.

This would add a further £485.80 to her current compensation offer, and would add £1,640.55 to a compensation offer of £6,931.92.

A spokesman from Aviva said: “We believe that the approach we take to paying interest when we have made a mistake is fair. Our focus is to always put customers back into the financial position they would have been in if the error had not occurred. Where a customer can demonstrate that they have incurred additional expense we will consider an alternative method on a case by case basis”.

Our reader is just one of around 600,000 retired savers owed compensation because they have been sold the wrong annuity.

Savers with medical conditions including diabetes should have been offered an increased annuity based on their lower life expectancy.

Calculations for Telegraph Money show that someone who spent £100,000 pension savings on an inappropriate annuity would receive a £20,000 sum in redress.

That figure could rise to £50,000 in cases such as this one, where customers were in moderate to poor health at the time the annuity was bought.

Do you think you may have been mis-sold a pension? Have you had a letter offering you compensation for mis-selling or errors with your pension? If so we want to hear about it. Email katie.morley@telegraph.co.uk.