The Financial Services Authority (FSA) has unveiled the details of its annuity investigation.
The FSA will conduct the work in two stages.
The first phase of this work will consider the level of detriment consumers suffer from not shopping around.
The second will depend on the outcome of the first phase, and will consider whether firms' processes for providing annuities facilitate or inhibit shopping around.
As part of the review the FSA will conduct a pricing survey of all annuity providers, and will compare the rates available to consumers through a range of distribution channels, including through the open market option and those only available to existing pension policyholders.
The FSA said the timing of the work will take account of the implementation of the Association of British Insurers (ABI) code of conduct, set to come into force on 1 March.
Nick Poyntz-Wright, FSA head of life insurance, said: '[Incoming regulator] the Financial Conduct Authority has set out its vision to make sure markets work well so consumers get a fair deal.'
‘An annuity purchase is an important one off decision that has long term consequences for individuals if they get it wrong.'
‘We want to understand the level of the potential detriment for consumers if they do not shop around to see if there are ways to make this market work better for consumers.'
Research by enhanced annuity provider MGM showed that 42% of the over 55s have not heard of the open market option (OMO), which was up from 2011 when 31% said they hadn’t heard of the OMO.
Andrew Tully, MGM Advantage pensions technical director, said the FSA probe should go further than just looking at pricing.
'The FSA has missed a trick by focussing on rate; we would like the review to go much further,’ he said.
‘Looking at rates ignores the fact that the best consumer outcomes require customers finding the right solutions. The market has seen much innovation and increased choice over the last few years, meaning many more potential options are available.'
Annuity adviser Alan Higham, director at Milton Keynes-based Retirement Angels, welcomed the FSA’s move.
‘This is extremely welcome; we badly need some authoritative facts in this market,’ he said. 'There’s a lot of people that are suspicious that annuities aren’t priced competitively. There’re a lot of people who feel that communications to members at retirement are totally inappropriate, and the ABI code of conduct doesn’t really solve it, as evidenced by the huge number of people who buy a badly priced product.'