Annuity providers will have to tell savers if they can get a better deal from another provider and how to get it, under proposed new rules outlined by the financial regulator.
An annuity works by providing a regular income for life once you've retired, and each year tens of thousands of people cash in their pension pots to buy one from an insurance company.
However, the Financial Conduct Authority (FCA) has found that 60% of customers don't switch providers when they buy an annuity and up to 80% of those could get a better deal elsewhere. It estimates that switching to the best possible deal could save you an extra £171 a year.
As a result, the FCA is proposing that from September 2017 something called an 'annuity comparator' is set up, in order to encourage customers to search for the best deal before they sign up for an annuity. The idea is that this will take the form of an information prompt before you purchase an annuity.
See our guide to taking your pension for full info on your private pension options.
Get Our Free Money Tips Email!
How will it work?
The information prompt savers will be shown before buying an annuity will have to show the difference between the providerís own quote and the best quote available from all other providers on the open market.
Behavioural testing carried out by the FCA found that when shown the annual increase in income that a consumer could gain from purchasing an annuity on the open market, a 27 percentage point increase was noted in the number of participants that went on to compare products from different providers.
What else is the FCA proposing?
As of September next year, providers will also be required to give you details of whether the annuity is a single or joint life product, whether the rate of income paid by the annuity is guaranteed and the total pot that will be used to buy the annuity.
Since the pension freedoms were introduced in 2015, the FCA has been collecting retirement data from a representative sample of firms on ad hoc basis. However, the regulator has now announced that it plans to introduce formal requirements on providers of retirement income products to provide data about the types and volumes of products they are selling.
'It's important consumers shop around'
Christopher Woolard, executive director of strategy and competition at the FCA, said: "Although sales have declined since the pension freedoms were introduced, annuities still play a significant role in retirement provision. Itís important that consumers shop around to get the best deal for them - yet our previous work found that very few people actually did so.
"We believe that the proposals we have outlined today will engage consumers and allow them to make better decisions, increasing shopping around and competition across the market."