By Nigel Callaghan
Many investors will have been saving in a personal or money-purchase company pension scheme for years.
Nigel Callaghan, Hargreaves Lansdown
Yet when they come to retire, they are often failing to convert that pot into an income that offers full value for money.
Indeed, some will be receiving much less than they should be.
And they will be unaware that they have been short-changed by their existing pension company.
This lack of knowledge on how to buy the best income on offer is costing some investors thousands of pounds.
I estimate that consumers are needlessly missing out on approximately £400m each year in the UK.
Equally galling is the fact that £40m is being paid to advisers for doing nothing in this cynical maintenance of the status quo.
Typically a pension company will pay a 1% commission at retirement to the independent financial adviser (IFA) who originally sold the pension to the investor - provided the investor does not take their pot of money and use it to buy their annual pension elsewhere.
This current system not only rewards indolence in the IFA community, but more importantly allows pension providers to maintain poor annuity rates which they know over half of their members will take up without scrutiny.
When you want to start taking a regular income from your pension pot, you typically do so by buying something called an annuity.
In exchange for your pension fund, an insurance company guarantees to pay you a regular income - usually monthly - for the rest of your life.
Insurance companies who provide these annuities look at a number of factors when deciding how much to offer you in exchange for your pension fund, including your age, sex, and general state of health.
You can also choose to ensure that the income continues to be paid to your partner, if you die before them, and for the income to increase each year to counteract the effects of inflation.
Some insurance companies are far more competitive in the annuity deals they offer than others.
Unless you shop around amongst insurance companies - known in the jargon as taking the Open Market Option - you may never learn how much more income your pension fund could have provided.
The amount that insurance companies are willing to offer you does vary hugely and there can be as much as a 30% difference between the best and worst.
A difference of 10% in guaranteed income is fairly common - that is 10% each and every year for the rest of you and your partner's lives.
As with many things in life, it pays to shop around and get the most for your money.
This is particularly true when considering your pension fund, which may well be one of the biggest assets you will ever own.
Converting your pension pot into an income tends to be a one-off decision, so if you get it wrong, you will have a long time to regret it.
Sadly, fewer than 50% of people actually do choose the best deal on the market - the vast majority simply buy whatever their existing pension company is offering.
This might be a pretty poor deal and could cost potentially thousands in lost income.
Recent research has suggested that 75% of consumers nearing retirement were simply unaware that they could shop around, as they would increasingly do as a matter of course for most other purchases.
Losing money away
Each year £4bn, about half the annual UK retirement market, is used to buy an annuity without consumers first shopping around.
On average, finding the best deal on the market generates about 10% more annual income than that being offered by their existing pension company.
That means that as much as £400m of the UK's retirement pie is being wasted each year.
Here are some golden rules
- Do not assume that you will get a good deal from your existing pension company.
- Always shop around to get the best value for money, just as you would with car and home insurance.
- At least as a starting point, use a comparison site on the internet or telephone a company that runs a comparison helpdesk. It literally takes just a few minutes.
- Seek financial advice from a company that specializes in retirement counselling - if you buy an annuity, this should not cost you, they should explain the income options available in simple English and they should take care of all the paperwork.
Follow these four simple rules and you could ensure a far wealthier retirement.
The latest figures from the government confirm that we are all living longer than our parents' generation.
The average 65-year-old man will live until they are almost 82.
Women will live longer still - a 65-year-old woman can expect to see almost her eighty-fifth birthday.
That means that the annuity you buy today could be paid for 20 years or more.
Meanwhile the baby boomer generation is beginning to retire.
It is estimated that there will be more than 400,000 people buying an annuity this year and that figure is likely to rise rapidly.
In fact, there are now more people aged 65 and over than there are under-16s.
So, with employees increasingly being offered money-purchase pension schemes, more and more people will find that crystallizing their lifetime pension savings, and buying a regular income, will be one of the most important financial decisions of their lives.
The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.