An annuity system that has been called 'bewildering' and 'unfair' is costing retirees billions, it is being claimed.
A joint report by the National Association of Pensions Funds (NAPF) and the Pensions Institute has found that around half a million people retiring each year are being short-changed by up to £1 billion from their total future pension income because of 'overwhelming' obstacles stopping them from getting the best deal.
The losses could grow considerably in the next decade – from £1 billion a year to £3 billion – as the annuity market matures as up to eight million people start being enrolled into workplace pension schemes.
The shortfall is being caused because so many people are choosing to stay with their pension provider when they buy an annuity with their pension pot, in effect taking the default option.
This failure to shop around for a better deal can wipe 30% off their annual pension income, and in some cases up to 50%.
Less than one in five people are thought to have the financial know-how to pick the right annuity at the right price.
But research found that people are not getting sufficient advice on how to best choose an annuity, despite it being one of the most important financial decisions people make during their lifetime.
Often, people get nothing more than a leaflet pointing them to a website with a postcode-based search engine.
There is also a widespread lack of knowledge about different annuity options, such as enhanced products which are designed to maximise income for people with health problems.
The NAPF is now calling on the Government and the retirement industry to work together to create a clearer, fairer system that delivers better value.
"The annuity market desperately needs to be straightened out if the UK is to pay for its old age. People are saving throughout their working lives only to end up short-changed by a toxic system," said Joanne Segars, chief executive of the NAPF.
"Every year a billion pounds that could have been paid out in pensions instead disappears down the plughole of a murky annuity market. Lower and middle income workers are especially vulnerable.
"There is no point in encouraging people to save if we do not help them get the most out of their savings."
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