The Financial Conduct Authority, which supervises firms in this market, has decided that an “annuity quotation ranking” will be mandatory in future after finding the market was not working well and many consumer were struggling to get the best available deals.
It will also require pension providers to redesign the information they provide to consumers in so called “wake up packs” that are given out in the run up to retirement.
“The retirement income market is set for the biggest change in a generation,” said Christopher Woolard, director of strategy and competition at the FCA.
“Over the next 12 months we want to ensure that the market is fit for purpose in the new landscape.”
The FCA’s new recommendations are contained in its Final Retirement Income Market Study report published on Thursday, and follows a widespread consultation with the industry done during January.
The FCA examined products purchased by UK consumers with their defined contribution pension pots that provided an income in retirement – specifically, annuities and income drawdown.
It concluded that many consumers were missing out by not shopping around for an annuity and switching providers, and some had not purchased the best annuity for their circumstances.
“Shopping around for an annuity is proven to increase retirement income for some and different providers will charge a variety of fees for drawdown and offer different levels of service and flexibility,” said Adrian Walker, head of retirement planning at Old Mutual Wealth.
“This shows the value of shopping around and we are glad the FCA wants to encourage savers to consider multiple providers at retirement,” he said.
Richard Eagling, head of pensions at Moneyfacts.co.uk said the FCA report “once again stresses the fact that competition in the retirement income market is not working as well as it could for consumers.”
“It is simply unrealistic to expect many retirees to have the time and inclination to carry out their own research on who is offering the best annuity rate,” he said.
The FCA’s study also found that consumers were often deterred from seeking the best available product by the length and complexity of “wake-up packs”, or because they do not believe the sums involved made shopping around worthwhile.
It said consumers tended to buy products from their existing provider which weakened competitive discipline on incumbent firms and made it harder for challenger firms to attract a critical mass of customers.
Going forward the FCA said it would also work with the Government to develop a “Pensions Dashboard”, which would allow consumers to see all their pension pots in one place , though this was a longer term goal.
Separately Britain’s Daily Telegraph newspaper said savers who had been sold inappropriate retirement contracts such as annuities may be able to receive as much as £50,000 in compensation under new arrangements being prepared by regulators.
The Telegraph said it understands that the FCA is working on the details of a programme in which up to one in four savers who retired in the past six years could claim redress from being mis-sold an annuity.