Competition in the retirement income market is not working as well as it could for many consumers, the Financial Conduct Authority has confirmed.
Publishing the interim findings of its market study into retirement income, the financial services watchdog said many people were missing out on a higher income in retirement by not shopping around.
But the analysis also showed that, for people with average-sized pension pots who don't want to take on much risk in retirement, the right annuity bought on the open market offers good value for money relative to alternative drawdown strategies.
Publishing the review, Christopher Woolard, the FCA's director of policy, risk and research, said that the government’s pensions reforms represented a game changer for the retirement income market.
Removing the need to buy an annuity meant people would be given more choice, but many will want some support to ensure they make the right decisions for them.
He urged firms to 'play their part' and improve the way they communicate with the customers. 'In order for the pension reforms to work and for people to have trust and confidence in the products they are buying, firms need to act now.'
The FCA recommended that firms make clear to consumers how their quote compares to other providers in the market. They also urged providers to take account of consumer behaviour when designing tools to support decision making, including the introduction of behaviourally trialled alternative to wake-up packs, which are currently sent to people nearing retirement to help them decide how to take their benefits.
In the longer term, a 'pensions dashboard' should be developed to allow consumers to view all their lifetime pension savings in one place.
The FCA also today published the conclusions of its review of annuity sales practices. This found evidence that sales practices were discouraging consumers from shopping around and said 'significant' improvements were required.
In particular, some firms failed to tell customers with specific medical conditions that other providers may offer them an enhanced annuity they themselves do not underwrite. There were also examples of the Association of British Insurers' code not being applied in practice.
The watchdog is asking most of the firms involved in the review to do further work under FCA supervision to see if problems are more widespread. A decision on further action would be taken following this work.
The FCA will also consult on replacing the ABI code with its own rules, which would cover all firms, not just ABI members.
Responding, the ABI said it had always stressed the importance of shopping around.
Director general Otto Thoresen said: 'Providers recognise that in the new pensions world of greater choice more needs to be done to ensure good outcomes for customers.
'The ABI had urged the FCA to replace our code and we are therefore pleased the FCA plans to develop the code into rules that will apply across the entire pensions market.
'Looking forward, we agree with the FCA that building a new system which focuses on customer behaviour is crucial and the industry will be looking closely at the report findings, and working with the regulator to address areas of concern.'