Annuity sales fell by 16% in 2013 compared to the previous year, according to figures from the Association of British Insurers.
ABI members in the UK sold 353,000 new contracts last year, worth £11.9bn in total, with members reporting an increase in the number of customers who chose to defer.
The number of annuities bought on the open market increased in recent years, the ABI said. Almost half (48%) of annuity sales were external in 2012 and 2013, compared to 31% in 2003 and 45% in 2011. Also, the popularity of enhanced annuities, such as medically underwritten contracts, continued to rise and stood at 28% in the fourth quarter of 2013.
The ABI also noted that the number of joint-life annuities rose and was at 33% in the fourth quarter of 2013. More people with smaller pots are now buying enhanced annuities, the ABI stated.
The average annuity was bought with a pension fund of around £35,000 last year. But the midpoint was around £20,000, so half of people buy an annuity with less than this.
Around 29% of annuities are bought with a pot of less than £10,000, the ABI said.
On shopping around, the ABI revealed that pot size was the strongest predictor of whether someone would shop around. The ABI noted that only 46% of customers with a pot of less than £10,000 shopped around compared to 63% of the total.
A pension pot of £5,000 will buy a 65-year-old in good health an annuity of around £20 a month, the ABI said. Most people with small pots - less that £10,000 - do not shop around or switch and most internal annuities are bought by people with small pots.
James Auty head of the Annuity Bureau told The Actuary that high annuity prices caused the market to react with alternatives to conventional products.
Alternatives such as investment-linked annuities and third-way annuities were more popular as they are more cost-effective for smaller funds, he said.
Auty added: 'Many people have simply had to make a decision to carry on working longer. Those who had no choice but to retire have been trying to maximise income as far as possible by applying for enhanced annuity terms.
'Gilt yields have improved a bit recently and if this continues I would expect the volume of annuity purchasing to increase.'
Also, commenting on the figures, Tom McPhail, head of pensions research at Hargreaves Lansdown, added: 'The retirement income market appears to be shifting, with demand for annuities collapsing and surging interest in drawdown. The first wave of baby boomers has passed age 65 but even so, we would expect annuity sales to stay high yet they were lower in 2013 than in 2011, when fewer people were reaching their mid-sixties.'
He added that there are lots of factors at work here, including the wider economic background, concern about future interest rates and actual retirement ages. The low annuity rates of recent may have also had an impact, McPhail said.
But David Robbins, senior consultant at actuaries Towers Watson, said: 'When trying to explain annuity sales figures, don't forget the demographics. There were 9% fewer 65 year-olds in mid-2013 than a year earlier and also fewer people aged 61-64.
'Of course, there are other possible explanations - from people delaying retirement to men bringing forward annuity purchase to 2012 when male-only products were still on the shelves. But you only buy an annuity once, and the biggest group of post-war baby boomers may already have bought theirs.
'The ABI says that 28% of annuities sold in Q4 2013 were enhanced, up from 7% in 2008. It's often overlooked that this will have an adverse effect on standard annuity rates - if insurers expect people buying standard annuities to live longer on average, the rates will be worse.'