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Changes to pensions rules have left consumers with “freedom but little choice”, as it becomes increasingly likely that the state will have to bail out people who outlive their retirement savings, a major new report has warned.

Two years ago, the UK government revolutionised the pensions market by sweeping away rules that forced pension savings to be spent on annuities, which provide guaranteed incomes for life. Instead, savers were given more choice about how and when to use their money.

Many experts, including Clive Bannister, chief executive of Phoenix Group, the insurer, have said that the changes were necessary.

“It was barmy to have to choose one product for the rest of you life,” said Mr Bannister. “There has been a period of enormous change, with intended and unintended consequences which still have to play through.”

But a new report out on Monday from the Pensions Institute, a research centre, and Cass Business School argues that far from opening up the market, the changes have actually reduced consumer choice.

“Pensions freedoms and choice has made the retirement income environment more complex for consumers,” the report said. “The vast majority do not seek advice which results in sub-optimal decisions and ultimately is detrimental to consumers.”

The report argues that the 2015 changes have undermined the annuity market, with annuity sales falling 75 per cent between when the reforms were introduced and the end of last year.

Annuities used to be a core product for many life insurers, but the drop in demand, combined with the EU’s Solvency II capital rules, has encouraged some large insurers, such as Prudential, to pull out of the market. Instead, insurers are focusing on savings products that do not offer financial guarantees.

“The vilification of annuities by politicians and the media has reinforced the belief that annuities are inherently bad products,” the report said. “The annuity market is rapidly becoming a niche sector, operated by a smaller number of specialists.”

The report’s authors are also sceptical about the income drawdown products that many consumers are now turning to. Drawdown allows savers to spend their money as and when they choose, but offers no protection to those who spend too much or live longer than expected. It is not a new product, but is being used much more extensively under the pension freedoms.

“Drawdown was only ever a stop-gap measure exploited by those who did not want to be forced to purchase an annuity,” the report said. “As such, it remains to be seen whether it offers either sufficient growth or sufficient protection to the majority of customers who need life-long income in retirement.”

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