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Guarantee costs for third-way annuities are not worth paying except in occasional circumstances, according to Intelligent Pensions.

Steve Patterson, managing director for Intelligent Pensions, said a mismatch in the advice given to clients could be created, with some being unwittingly placed at a significant disadvantage as a result.

He said: “Typically, the cost of this insurance is up to 1 per cent of the fund a year, which does not sound a lot but over a 15-year period the remaining drawdown fund could go up to 20 per cent lower, with a direct knock-on effect to the lifetime annuity thereafter.

“I suspect that prospective investors may not fully appreciate the long-term impact when the benefits are being explained to them and hope that the FSA keeps a close track on how these plans are being recommended.”

Jason Walker, senior manager for Bath-based AWD Chase de Vere, said: “For the right client it offers something. With these annuities you need to be invested in the market with a guarantee attached to it.

“With annuities becoming more segmented, with post code and impaired life, people are living longer and retiring earlier which means that standard annuity rates are going to come down.

“These contracts are going to be expensive, but if you are paying for the guarantee, you would look at if the client has a substantial pension pot.”