Retirement should mean cruises, more time on the golf course, and enough left over to help the grandchildren.

However, hundreds of thousands of Britons are being deprived of as much as £3,213 of income a year — or £64,260 over a 20-year retirement — after their schemes failed to give proper advice on how to get the best return from their investments.

Independent research from annuity provider Just Retirement this month showed firms are collectively depriving retirees of as much as £500m by failing to direct policyholders toward the so-called “open market option”. This is where you exercise your right to buy an annuity — which pays an income for life — from any firm, not just the one that managed your pension. However, fewer than half of retirees do so.

Jerry McLoughlin, of Punter Southall, an adviser, said: “We recently added 14% to the retirement income of one company scheme member. With money-puchase scheme pension pots now averaging £300,000, shopping around is more important for members.”

The Financial Services Authority (FSA), the City watchdog, warned in a report this month that it would get tough on personal-pension firms that refused to play fair by the end of the year.

With annuity rates at a five-year high following the credit crunch, failing to exercise your open-market option could cost you dear. The best rate today is at £7,773 from Aegon Scottish Equitable for a man aged 65 retiring with a £100,000 pension pot, compared with £6,920 at best in 2006, an increase of 12.3%.

Nigel Callaghan of Hargreaves Lansdown said: “The fallout from the credit crunch is that yields from corporate bonds — the investments that underpin annuities — are up, while the recent stockmarket rally has also increased the value of personal pension pots.

“Despite the good rates on offer, the vast majority of people buying a pension now are going to end up with the same sub-standard annuity rate, as the better rates are only being passed on by the big five firms.”

The FSA said this month the gap between the best and worst rates offered by funds had widened to 20%.

However, experts said attention also needed to be paid to occupational schemes. McLoughlin said: “There is a responsibility by law for company schemes to advise members of the open market option. Some companies go a step further and conduct a search for members.

“Nonetheless, you should seek indepdent advice to make sure you are getting the best deal, especially if you are a smoker or if you are single and the company scheme option includes a spouse pension.”

About 550,000 people hit retirement age in Britain last year, and of those about 430,000 took annuities, compared with income-drawdown plans. Official estimates show that by 2012 about 800,000 will hit retirement. Callaghan said: “Funds are aggressively trying to retain as much of a market share as possible and are depriving their policyholders of access to the best rates if they are being offered by someone else.”

The FSA is also investigating allegations that insurers are delaying the transfer of funds, should a policyholder elect to go elsewhere, reportedly costing hundreds of pounds or causing retirees to lose their pension altogether.

Hargreaves Lansdown has referred 30 cases to the FSA, accusing Windsor Life of delaying fund payouts. The firm said it was working to clear the backlog.

You could also boost your income by taking an enhanced annuity. If you smoke 10 or more cigarettes a day, suffer from diabetes or a terminal illness you could be entitled to add as much as 15.8% to your annuity by buying a product from a specialist provider like Partnership Assurance, Just Retirement, Prudential, Axa and Norwich Union. If you live in an area where average life expectancy is lower, such as parts of Glasgow or Liverpool, you could get a higher annuity from Legal & General. The closer you are to retirement the more likely you will be eligible.

It is thought those buying annuities last year lost £1.25 billion worth of pension benefits by not accessing enhanced annuity rates.

A better deal by shopping around

Michael Masterton, 69, of Chelmsford, Essex, retired as an engineer with a £35,762 pension pot invested with Barclays.

He took £8,940 as tax-free cash and was offered an annuity but was offered 25% more from GE Life.

He secured a yearly income of £2,492, and was given an enhanced rate as he had been diagnosed with liver cancer.

He said: ‘Barclays hadn’t asked for my medical history, and didn’t take it into account in their quote, so if I hadn’t gone in search of a better deal, I would be a lot poorer now.’

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