Anyone approaching retirement who wants to turn their pension pot into a regular income has been urged to do their research or risk throwing away thousands of pounds.

Approximately 60% of people fail to heed this advice and take their pension provider's annuity plan – which converts your nest egg into an income – rather than sourcing the best deal from the multitude of available providers. This is often referred to as using the open market option.

A 65-year-old man with a £50,000 pot could be at least £7,000 worse off over his lifetime if his provider offers a poor rate that he accepts (see the Annuities Guide).

The warning comes in the same week it was revealed annuity rates are at an all-time low, which means pensioners will get less income in real terms than ever before. This makes it even more important to pick the best possible annuity.

George Ladds, from annuity provider Fair Investment Company, says: "With rates falling, it has never been more important to use the open market option to ensure you are getting the absolute best quote for your pension fund."

He also warns rates could fall further: "As we live longer, annuity rates are going to go down and pensioners have to accept that.

"But what they don't have to accept is the quote being offered to them by their provider, because more often than not, it will be beaten."

The Government is so concerned about consumers picking the wrong annuity that Treasury financial secretary Mark Hoban has asked the industry to explain why so few people are accessing the open market option.

£7,000 shortfall

Figures from financial advisor firm Hargreaves Lansdown demonstrate the importance of picking the best deal.

A 65-year-old man with a £50,000 pension pot could earn £3,228 a year with the best annuity rate today, compared to £2,892 with the worst, from the rates published on the Financial Services Authority's comparison tables. Some providers refuse to disclose rates, meaning their offering could be even worse.

If that man lived to 86, as a healthy 65-year-old is expected to, the difference between the best and worst of the published rates is £7,056 over his lifetime.

A healthy woman of the same age with a £50,000 pot who lived to an expected 89, would be £6,624 worse off by picking the worst deal over the best.

The poorest offering would generate just £2,760 a year, compared to £3,036 from the top deal.

Research firm Moneyfacts says the average male annuity rate has dropped by a whopping 45.5% over the past 15 years, and female rates are down by 41.8%.

Richard Eagling, from Moneyfacts, says: "There has been a spate of annuity re-prices over the summer months which has unfortunately left rates at record lows.

"In a few months the first baby boomers will hit retirement. Often perceived as the lucky generation, they are likely to face a rude awakening when they come to secure their retirement income via an annuity.

"Tomorrow's pensioners face a desperate battle to secure a comfortable retirement."

Those with a final salary pension usually do not need an annuity as their plan automatically generates a retirement income based on their final salary and years of service.

Annuity choice

Until earlier this year, everyone with a private pension, other than final salary scheme members, had to turn their pot into an annuity by age 75.

However, Chancellor George Osborne announced in this year's emergency Budget that this rule was to be scrapped.

This means instead of handing your cash to an insurance company in return for an income, you can instead draw cash from your pension savings.

Experts warn this option comes with significant risks for those with a smaller pot, typically under £200,000, as your money could run out; while it is also invested, so it could plummet in value.

Further reading/Key links

Boost income: Benefits Check-Up, Pension Credit, State Pension Boosting
More on pensions: Pensions Guide, Free Annuity Guide