Warning on private sector pensions

Updated: 
hands hodling crumpled fiversAround half a million private sector workers retiring each year are being "short changed" by up to £1 billion from their total future income, pensions bodies have warned.

Evidence of "sharp practice and murky pricing" in the annuity market was highlighted in a report from the National Association of Pension Funds(NAPF) and the Pensions Institute (PI) at Cass Business School.

It called for more transparency and greater scrutiny from Government, with more "shopping around" to help retirees get the best deal. Failing to shop around for a better deal can wipe 30% off someone's annual pension income and in some cases halve it, the report said.

PI director Professor David Blake said: "This report is a wake-up call to the pensions industry, the Government and the regulators.

"If the annuity system is not radically 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."

When they retire, workers in the private sector saving in a defined contribution (DC) pension use their pension pot to buy an annuity from an insurer, a decision which sets the size of their pension for life.

The report - entitled Treating DC Scheme Members Fairly in Retirement? - said the majority of people stick with their existing pension scheme provider as the "default option".

The loss could treble in size to £3 billion as the annuity market matures and as people start being automatically enrolled into workplace pensions from this October, the study said.

Mark Hoban, the Financial Secretary to the Treasury, said: "I welcome the NAPF's contribution to the debate on how to help consumers get the best from the annuity market.

"The Government recognises that there are particular issues about individuals accessing small pension pots, which is why the Government announced in December measures to allow holders of small personal pension pots to take up to two small pots as a lump sum, and why the Department for Work and Pensions are consulting on options for reform."

© 2012 Press Association

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