Private sector workers are taking a £1bn hit on their pension incomes every year as a result of the “hugely unfair and opaque” annuity system, a new report claims.
The joint report by the National Association of Pension Funds and the Cass Business School calls for a range of fundamental reforms to the way people shop around for a retirement income.
These include building a shopping-around process into all pension schemes, increasing transparency in annuity pricing, commission and retention of business and increasing the Government’s scrutiny of the annuity market.
NAPF chief executive Joanne Segars says: “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.
“Every year, £1bn that could have been paid out in pensions instead disappears down the plughole of a murky annuity market. The way the market is priced and structured must become more transparent and people need stronger support in picking the right annuity. The Government and the industry must work harder to create a clearer, fairer system that delivers better value for money.”
Cass Business School director Professor David Blake says: “This report is a wake-up call. If the annuity system is not overhauled, employees in defined contribution schemes in the private sector will continue to suffer massive detriment and the Government’s new auto-enrolment regime will fail the very people it aims to help secure financial independence in retirement.”
Hargreaves Lansdown head of pensions research Tom McPhail says: “We need to introduce an easily accessible directory of shopping-around brokers to help investors, particularly those with small pension pots.”