The poor performance of annuities for retirement savers has prompted the Financial Services Authority (FSA) to look at the way the market serves investors.
The FSA is taking a two-level approach, probing how badly affected potential retirees are when they accept the annuity being offered by their pension provider.
Annuities are long term investments bought with a pension lump sum that pay a monthly income.
Though in recent years, annuity rates have fallen steadily and often offer lower returns than many retirees are expecting.
When someone retires, the provider must, by law, tell them that they shop around the open market for the best rates and terms.
For those who follow the advice and seek a better annuity, they generally earn around 20% more with a new provider.
Review is timely
The FSA investigation will look at the rates being offered and then, depending on the outcome of that inquiry, they will examine what the pensions industry does to prevent or discourage retirees from shopping around to get better annuity rates.
A spokesman for the FSA said: “We have outlined our vision to ensure markets offer consumers a fair deal.
“That’s because the buying of an annuity is an important, one-off decision which brings with it long term consequences should the person retiring get it wrong.
“The FSA wants to find out what the extent of the detriment is to those who do not shop around for a better annuity rate.”
A spokeswoman for the Association of British Insurers said their members have been preparing for a new code of conduct in March on ‘Retirement Choices’ which prompts clients to think carefully about their decision.
She added: “The annuities market is changing so a review of it would be timely.
“Our initiatives provide those approaching retirement with clarity and the confidence they will need to prepare for retirement and that includes encouraging them to shop around for advice and support, and we help point them in the right direction.”
Around 400,000 people buy an annuity every year and so any help in making the right decision is vital, she said.
A spokesman from annuity specialist MGM Advantage said: “We think the review should go further than looking at the rates because the best results for consumers depend on them finding the right solutions.
“However, the consumers who tend not to shop around are those with smaller funds or who don’t use independent financial advisors but they are the very people who should be making more from their hard-earned savings.”
He added that the best course of action for the annuity industry would be to end the practice of rolling over maturing pensions into internal annuities.