Savers are losing £1 billion in the murky world of annuities.
A joint report just out from the National Association of Pension Funds and the Pensions Institute has slammed the annuity business, describing the sale of annuities as "hugely unfair and opaque", and claiming that many retirees will lose between 30% and 50% of the income they could be enjoying in their retirement. It's a sum, they reckon, that could easily reach a massive £1bn.
To make things worse, that total could treble in the next 10 years, to £3bn, as the number of people automatically enrolled in workplace pensions starts to rise.
Toxic system
In the words of NAPF chief executive Joanne Segars: "The annuity market desperately needs to be straightened out if the UK is to pay for its old age. People are saving through their working lives only to end up short-changed by a toxic system."
The problem, it seems, stems from opaque and uncompetitive pricing from pensions providers. Most retirees simply get their annuity from the pension provider managing their fund, and just accept the rates offered with no real idea that there are alternatives or that they can shop around for a better deal.
With four out of five savers having pension pots of less than £50,000, it is low to middling earnings who are suffering most -- and those are the ones least likely to have the financial knowledge to look for alternatives.
Employers could do more to help as well, according to the report, as most do not really offer any support -- they just leave it to the pension provider to deal with it.
What should you do?
The compulsory purchase of an annuity by the age of 75 has been abolished now, and pensioners have more flexibility over how to manage their nest egg. But the criteria are quite complex, and an annuity is still the only practical option for many.
When you get close to the age for one, your pension provider will most likely approach you and make you an offer. And that's where many come unstuck, by just accepting the first offer. It is likely to be a poor one, and can usually be beaten elsewhere.
For example, I've just tried a web search on "annuity rates", and the first page of results threw up some useful-looking comparisons -- and the rates on offer are surprisingly varied. So shop around, and get a better deal. And if you can't get your current provider to match what's on offer elsewhere, just switch. The provider you want to switch to will almost certainly be able to sort out the switch for you.
There are other options
Of course, another option while you're still working and saving for your retirement is to look for alternative investment vehicles to start with. An ISA, for example, can be a great long-term home for retirement savings. Tax rules on ISAs and pensions are different, so some combination of the two can often be used to best advantage.
But, ultimately, when the letter drops through the door with that initial annuity offer, remember that there are competitors out there who want your investment cash and will offer you a better deal for it. So do shop around, and do your bit to fend off the feared £3bn rip-off.
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