The Financial Conduct Authority (FCA) will also say today that it found evidence of “poor practice”, such as misleading or unclear information, on all but one of the 13 comparison websites it reviewed as part of its study.
According to the Association of British Insurers (ABI), about 420,000 annuities are sold each year, enabling people to convert their pension savings into an income when they retire.
Based on a pot of £17,700, the FCA said a customer could buy an annual income of £1,030 if they stayed with their pension provider, but that could rise to £1,101 if they shopped around. Those with health problems could get even more, because of their reduced life expectancy.
However, FCA chief executive Martin Wheatley, pictured, said those with low levels of savings would struggle to find a better deal, as very few firms offer annuities to people who have built up a pension pot of less than £5,000. Standard Life said it is open to business for customers with as little as £3,000 in savings.
Wheatley added: “Once you’ve bought an annuity you can’t change your mind. For most people, getting the right annuity could mean the equivalent of an extra £1,500 in savings – so we need to understand why they aren’t shopping around and switching.”
The FCA found that 60 per cent of people buy their annuity from the same company they saved their pension with, but 80 per cent of those would get a higher income if they went elsewhere.
Steven Cameron, regulatory strategy director at Aegon UK, said: “We want savers to be well rewarded for taking a positive approach to retirement planning, and this means the whole industry needs to do all it can to help people understand their financial options around their pension savings.”
ABI director-general Otto Thoresen admitted the market “isn’t working as well as it could” but said the trade body was finalising a package of measures to help people make the most of their savings, such as giving all customers a comparison of annuity rates.
The FCA will publish its interim findings this summer, with its final report and recommendations due within 12 months, but Thoresen urged the watchdog to speed up its work “as a year is a long time to wait”.
He said: “We fully support efforts to help people make the most of their savings so they have more chance of securing a decent retirement income. Looking at how the trivial commutation rules work has to be part of the answer.”
Trivial commutation allows people to take a cash lump sum instead of buying an annuity if their pension pot is worth £2,000 or less, or if the total value of all their schemes is no more than £18,000.
Richard Jones, annuities director at Scottish Widows, said reviewing these thresholds could “make a real difference” for retirees, while comparison services need to be more transparent on costs and commission charges.
He said: “The current system of annuity provision has to be improved.”