However, a new code of conduct for insurers, which was introduced yesterday amid calls for people to be better informed of their choices at retirement, has met with scathing criticism from long-established online service Annuity Direct.
The Financial Conduct Authority (FCA), which will take over some regulatory duties from the Financial Services Authority, said it would be taking tough measures to ensure consumers get a fair deal.
But Alan Higham, chairman of Annuity Direct, says the new code of conduct will be seen as flawed and insurers could be forced into another damaging mis-selling review.
He says the overhauled information packs being sent to retirees by their pension companies feature out of date rates for sample people, which won't necessarily reflect the circumstances of the consumer.
He added: "Advisers such as Annuity Direct will be left trying to explain why these rates don't in fact exist and I suspect a great number of people will simply not believe us."
Mr Higham says there is still no guarantee that people who qualify for a higher annuity for medical reasons will know about it, that people will not shop around if they already have a valuable guarantee with their existing provider, or that they will understand the need to protect a spouse: "40% of married men buying a single life pension do so without realising they have excluded their wife."
The new packs do not include application forms, in theory to slow down a 'default' purchase. But Mr Higham says: "Over 60% of people see their current provider as their main trusted source of help. Even more people will call the provider first, as the pack is so confusing, and most providers are willing only to talk about their own products or at best one other company's annuity with which they have a preferential deal."
He adds that despite a directory of advisers being created by specialist firms in June 2012 and offered to the ABI, it was not being promoted by insurers.
"The ABI should collaborate with specialist retirement advisers and the Society of Later Life Advisers, who want to see a directory of accredited advisers – there are thousands of people who could meet a reasonable minimum standard and provide the link that consumers need."
Most people buy an annuity with the bulk of their pension fund when they reach retirement age. The annuity pays a fixed income for the rest of your life, so allows you to budget with certainty.
But once you have bought an annuity, there is no going back; you cannot change your mind at a later stage. It is therefore crucial to make the right decision.
Unfortunately, many people make the wrong decision and buy their annuity from the company that managed their pension savings. Figures suggest about 60% of savers do not shop around for a better rate, which could result in a lower income.
Andrew Tully, pensions technical director of MGM Advantage, an annuity specialist, says: "Over 20 years, the difference between the best and the worst annuity rates could be as much as £15,220 in 'lost' income."
Since 2002 insurers have been obliged to point out to customers that they have the right to search the market for an annuity – known as the open market option. But Mr Tully says: "Our research shows that 42% of the over 55s have not heard of the open market option, so there is clearly still a huge amount of work to be done."
Douglas Baillie, a Perth-based adviser who also runs comparemyannuity.com, says: "Pension firms do not alert customers adequately to the open market option or explain their options clearly. The details are often hidden in the small print in technical language that can read like gobbledegook. Of course, it is all in the interests of the pension company because it can make more money by keeping hold of the customer and selling an inappropriate annuity."
Mr Tully says the FSA's review is too narrow and will not cover all people's annuity options. Figures suggest that as many as 70% of consumers could qualify for an enhanced annuity because their health or lifestyle indicates a shorter life expectancy.
He says "The ABI code is a step forward but the obligation to ask a medical question is not the same as an obligation to offer information about enhanced annuities. Savers could still miss out."
Annuity rates have plunged by more than 20% over the past three and a half years, according to MGM Advantage. A 65-year-old with a £50,000 pension fund could buy a standard annuity of an average £2786 a year at current rates, compared to £3495 in January 2010 – about £14,000 less over a period of 20 years.
Graeme Mitchell of Glasgow IFA Lowland Financial says: "There are so many options available at retirement and the right annuity depends on a number of factors including your health, personal circumstances and the size of your pension fund. The decision should not be taken lightly and in many cases people can boost their income by seeking appropriate financial advice."
Over 20 years, the difference between the best and worst annuity rates could be as much as £15,220 in income
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