Savers are being ripped off by ‘murky’ annuity market

Millions of workers are losing billions from their savings because of “sharp practice and murky pricing” in the annuity market, research claims.

A joint report by the National Association of Pension Funds and the Pensions Institute at Cass Business School blamed "overwhelming obstacles" preventing people from accessing the best deal alongside annuity prices that are "heavily manipulated".

The report recommended a new open market process should be built into all pension schemes to help people shop around automatically.

NAPF chief executive Joanne Segars (pictured) described the annuity market as a "toxic system".

She said: "The annuity market desperately needs to be straightened out if the UK is to pay for its old age. Every year a billion pounds that could have been paid out in pensions instead disappears down the plughole of a murky annuity market."

Cass Business School's Pensions Institute director professor David Blake called for a "radical overhaul" of the annuity system.

The report found half a million people retiring each year are "short-changed" by up to £1bn, but the NAPF and the PI said that could rise to £3bn over the next decade as the annuity market matures and up to 8 million people are auto-enrolled into a workplace pension scheme.

The report said about 20% of the losses were passed on to the public in the form of lost taxes and higher means-tested retirement benefits.

The report comes as the Association of British Insurers closes their consultation on the open market option.

It found that the failure to shop around can wipe 30% off an individual's annual pension income, and in some cases up to 50%.

The report also found that low to mid-income workers are the worst-affected - with most annuity providers not providing advice on pots of less than £50,000 because they are not profitable, even though 80% of savers are in this bracket.

It highlighted a "severe lack of transparency and understanding" on annuity prices, especially for those with medical conditions and pointed to evidence that some insurers push rates downwards at certain pot sizes as a group of people approach retirement, banking on them accepting the first quote.

MGM Advantage chief operating officer Craig Fazzini-Jones said: "It is essential that as an industry we unlock consumer inertia surrounding a decision that affects so many people who need to make the most of their hard saved retirement savings.

"We need radical reform of the open market option to make this work. Sometimes as an industry we need to make important decisions without unanimous agreement, particularly when there are such strong benefits to consumers, and our industry's reputation.

"What is very evident is that those customers who have access to professional financial advice do shop around and secure the best product and rate for their individual circumstances. By taking some very simple steps, we can ensure many more people would benefit from better products and annuity rates than today."