Half a million people retiring each year are losing out on as much as £1 billion from their total future pension income because of the way annuities are sold, according to a new report.

The National Association of Pension Funds said the sale of annuities in the UK is “unfair and opaque”.

The report also suggested that it is too difficult for savers to find the best deal.

It claimed that the open market option is not readily available to those with a pot of less than £50,000 – which equates to 80 per cent of retirement savers.

Even those savvy enough to shop around for the best rate struggle to do so because the best shops are not signposted, the report added.

“There is a severe lack of transparency and understanding about how annuities are priced, especially for those with medical conditions who could qualify for a much higher level of pension income,” it stated.

Joanne Segars, NAPF chief executive, said that the annuity market desperately needs to be straightened out.

“Every year a billion pounds that could have been paid out in pensions instead disappears down the plughole of a murky annuity market,” she said.

“The way the market is priced and structured must become more transparent and people need stronger support in picking the right annuity.”

Craig Fazzini-Jones, chief operating officer of MGM Advantage, said: “We need radical reform of the open market option to make this work.

“By taking some very simple steps, we can ensure many more people would benefit from better products and annuity rates than today.”