Around 50,000 Scottish private-sector workers retiring each year are losing up to £100 million annually because of a "toxic" system of poor returns from retirement annuities.

A report today predicts the losses suffered by people locked out of lucrative final-salary schemes could treble to £3 billion over the next decade as up to eight million workers face being automatically enrolled into workplace pensions from later this year.

It says the closure of most company final-salary pensions has left a "hugely unfair and opaque" system and found evidence of "sharp practice and murky pricing" in the annuity market.

The research carried out by the National Association of Pension Funds (NAPF), whose members run the UK's final-salary pension schemes and the Pensions Institute (PI) at London's Cass Business School, says the 500,000 people retiring each year in the UK are losing up to £1bn, or £2000 a year apiece, because "overwhelming obstacles stop them getting the best deal" when buying an annuity.

It called for more transparency and greater scrutiny from Government, with more "shopping around" to help retirees get the best price. It warns around 20% of these "toxic" losses are passed on to the public in the form of lost taxes and higher means-tested retirement benefits.

Joanne Segars, chief executive of the NAPF, said: "Every year a billion pounds that could have been paid out in pensions instead disappears down the plughole of a murky annuity market. Lower and middle-income workers are especially vulnerable."

While the minority of workers in final-salary schemes receive a set income in retirement, the majority have amassed pension pots which must be used to buy an annuity to provide a retirement income.

Although there has long been an option to shop around for the best annuity from insurers, the majority still go for the "default" option by sticking with their pension scheme provider.

It can wipe 30% off potential retirement income, and in some cases up to 50%.

The NAPF/PI report found 80% of savers have pots of less than £50,000, and most annuity advisers do not find it profitable enough to advise on sums of this size. It says: "This will have a real impact on the millions of low to median earners auto-enrolled into a pension."

It says fewer than one in five people has the know-how needed to pick the right annuity at the best price.

Even those wise enough to shop around struggle to do so because "it is virtually impossible to find a specialist adviser who covers the whole market".

It warns of too little support from employers or providers for people choosing an annuity – "often they get nothing more than a leaflet pointing them to a website with a postcode-based search engine".

The report, partly based on extensive interviews with companies that cover 80% of the annuity market, also reveals annuity prices are "heavily manipulated". It found:

l A severe lack of transparency about how annuities are priced, especially for those with medical conditions who could qualify for a much higher level of pension income.

l Most savers pay commission when

they choose an annuity, without realising it – it is factored into annuity rates whether the saver gets any advice or not.

l Some insurers "push rates downwards at certain pot sizes . . . as they expect many will not look for a better deal and will accept the insurer's first quote".

l Annuity rate bands have inflexible "cliff edges", penalising customers who could get a better rate by having as little as £1 more in their pot.

Ms Segars said: "The annuity market desperately needs to be straightened out if the UK is to pay for its old age. People are saving through their working lives only to end up short-changed by a toxic system."

PI director Professor David Blake said: "This report is a wake-up call to the pensions industry, the Government and the regulators."

Mark Hoban, the Financial Secretary to the Treasury, said: "The Government recognises that there are particular issues about individuals accessing small pension pots, which is why the Government announced in December measures to allow holders of small personal pension pots to take up to two small pots as a lump sum, and why the Department for Work and Pensions is consulting on options for reform."