Free market think tank Centre for Policy Studies sounds alarm over pension reforms

A free market think tank has warned over government plans to overhaul the current pensions system in May, saying freeing people from obligation to buy an annuity exposes them to "potentially dangerous" risks.

In his 2014 budget, Chancellor George Osborne abolished the obligation on retirees to buy annuities – a guaranteed life income – with their pension pots, saying they could instead spend it as they see fit.

But while the Centre for Policy Studies welcomed the liberalisation, it said there were "legitimate concerns" these reforms meant some people would fail to buy the products necessary for a comfortable retirement.

"Some may take lump sums, meaning that they may run out of money before death (perhaps to fall back on the state); some might fail to appreciate the risks involved in any decision about retirement savings (the main risks being inflation, investment and longevity); others might succumb to fraudsters," Michael Johnson, the report's author and a pensions expert, said. "In this light, de-emphasising annuitisation does not feel like a sensible policy. Indeed, it is risky and potentially dangerous."

To hedge against this, the report recommends a default option called "auto-protection", letting savers who are unsure about what to do with their pensions to enrol in an auction house for annuities, with the right to opt out.

The non-profit national auction house for annuities would introduce pricing tensions, alongside greater transparency which is lacking from the current system, by publishing transaction prices on its website each day.