Millions of private-sector workers saving for their retirement are at the mercy of a "hugely unfair annuity system" which lops up to £1bn off their combined pension incomes every year, according to leading pensions experts.
A joint report by the National Association of Pension Funds (NAPF) and the Pensions Institute (PI) at Cass Business School found that around half a million people retiring each year are being short-changed when converting their pension pot into an annuity – an income for life.
The report says the process for choosing an annuity is too complex and, as a result, the majority still go for the "default" option by sticking with their pension scheme provider. This failure to shop around for a better deal wipes an average of 30 per cent off their annual pension income, or up to 50 per cent for some.
"The annuity market desperately needs to be straightened out if the UK is to pay for its old age," said Joanne Segars, NAPF's chief executive, below. "People are saving throughout their working lives only to end up short-changed by a toxic system. Every year a billion pounds that could have been paid out in pensions disappears down the plughole of a murky annuity market.
"There is no point in encouraging people to save if we do not help them get the most out of their savings. Too many end up stuck with the wrong annuity at a bad price," Ms Segars concluded.
In response, Tom McPhail from independent financial advisers Hargreaves Lansdown, said: "Investors should not expect their insurance company to offer the best deal. It is only by shopping around, both to find the right type of income and the most competitive rate, that investors can expect to get a good deal at retirement."