Trustees could be guilty of maladministration if they fail to advise members buying an annuity about the open market option, The Pensions Advisory Service warns.
TPAS chief executive Malcolm McLean said insurance companies and trustees had an obligation to inform members about OMO and could face legal action if they failed to do so.
"They need to spell it out or face the risk of maladministration. The majority of people don’t shop around. Insurance companies and trustees need to be quite clear about OMO to give people the best annuity their pension can buy.
"If people purchase an annuity without the knowledge of OMO, it could technically not be classified as a lifetime annuity and therefore could be seen as an unauthorised payment with tax consequences for both the scheme and the individual concerned," he said.
McLean said the failure to provide sufficient advice on OMO could result in a 40pc unauthorised payment charge, 15pc scheme sanction charge and a 15pc surcharge – which would fall to the member.
"In this situation the member would have a good case to recover his or her tax from the scheme administrators on maladministration grounds. Trustees do need to make sure they offer members the OMO in clear, unambiguous terms and without equivocation," McLean said.
Hammonds pensions lawyer Clifford Sims said it was essential any advice came from a third party and not from trustees.
Sims said trustees could face penalties if they did not provide information to members on OMO within the six months before retirement, but proving it might be difficult.
He explained: "A member would have to prove an injustice or a scheme requirement has been breached, not so much a breach of regulation but more a breach of conduct."
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