A former government pensions adviser has warned that hundreds of thousands of people who have invested in private pension funds have lost out…
Ros Altmann said they had received a lower retirement income as the option to shop around had not been made clear.
Experts say that if they had shopped around they could have received an extra 15% on top of their pension.
They stress that people do not have to take their retirement income from the same company that they have saved with.
Final salary schemes
Retiring on a works pension used to be straightforward. Most people put money into a final salary scheme and their pension was automatically paid when they retired.
Now final salary schemes are not an option for many people and their pensions are much more complicated. The options include personal, stakeholder and money purchase deals.
What they all mean is that while you are working, you pay money into a pot but when you retire you need to convert that pot into a retirement income – money that you receive every month.
But you do not have to take that monthly income from the company you saved with, you can shop around and may get a much better return.
The financial regulator, the Financial Services Authority, studied letters sent by 55 pension companies and found that 40% of them failed to meet its rules.
A significant number failed to explain that by shopping around for a pension income, people could be better off.
Felicity Strom took her private pension four years ago and says she has missed out because she did not realise she could shop around.
“I found that I could not understand the jargon,” she said.
“It wasn’t at all clear to me and I just wished that I had been aware at that time that I could actually have shopped around.”
Ros Altmann, a former pensions adviser to the government, says the government knew in 2000 that pensioners were losing out, but did not do anything.
She estimates that well over a million pensioners have lost out as a result of the government’s refusal to tackle the problem.
“The Government has just ignored the problem and allowed the insurance industry to continue with its practices which are opaque, which people just don’t understand,” she said.
“The insurance companies should definitely be doing more and the government should be requiring them to be doing more.”
Buying an annuity is a once in a lifetime decision, according to pensions expert Tom McPhail from Hargreaves Lansdown.
“The importance of shopping around is that once you start drawing your retirement income you’re locked in,” he said.
“But typically you can get a 15% increase if you shop around. But if you don’t do that you’ve missed out and it’s gone for life.”
The Association of British Insurers (ABI), admitted that the letters needed to be clearer.
“We’ve said the standard of communication sent out to customers has been of mixed quality,” said the ABI’s Jonathan French.
“That’s why we’re doing all the work we’re doing to make things much clearer to make sure consumers have all the knowledge that they can shop around and ultimately get best value for money from their retirement income product.”
The ABI says the insurance companies will start sending out the new style letters; which will be between one and two pages long, in the summer.
Meanwhile the government says it has already published a review of the market for retirement income and will be updating its progress in the autumn.