The Financial Services Authority (FSA) inquiry will examine the varying rates offered to pensioners when they sign up to an annuity, which provides them with a stable annual income when they retire in return for their private pension pot.
The City regulator will look at whether or not people are given enough encouragement and information to shop around.
Analysts said Edinburgh-based insurer Standard Life and Resolution are most at risk from the regulatory probe because they sell annuities mainly to their own customers, and potentially have the most to lose.
The main players in Scotland's insurance sector, which employs 20,000 people and manages over £726bn, said that they would co-operate with the review.
Politicians and regulators have raised fears that many Britons of retirement age are simply accepting the offer tabled by their pension pot holder, which is not providing enough information about other options.
Under what is called the "open market option", people reaching retirement age are allowed to take their pension pot and shop around other providers for the most favourable annuity deal.
There can be a difference of nearly 20% in the rates offered by different providers, which means some pensioners could be missing out on a substantial boost to their incomes.
An FSA spokesman said: "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."
The FSA will examine both the pricing of annuities and how they are advertised to savers.
Lloyds Banking Group, which includes Bank of Scotland, Lloyds TSB and Halifax, is already offering a new online annuity comparison service, which allows people to compare quotes from 11 annuity providers, including Prudential, Aviva and Legal & General.
Christina Fairbairn, a retired catering manager from Wishaw, North Lanarkshire, took advantage of a free annuity advice service introduced by Nationwide in March and found she was far better off by switching.
Her husband George said: "It's like buying car insurance, you don't take the first quote. What the FSA are trying to get over is there is not the awareness there. People don't shop around.
"But it is clear that you don't have to be committed to your original pension provider."
Joanne Segars, chief executive of the National Association of Pension Funds , said greater transparency is essential if people are to have faith in pensions.
She said: "Consumers are dealing with an unfair and opaque system that is preventing too many of them from securing a decent income for their old age."
Around 10 million people will be placed in workplace pensions in the coming years under the Government's landmark automatic enrolment scheme to tackle the pension savings crisis.
Over the course of this year, the review will look at how people are being left out of pocket by not shopping around and whether this is more likely to happen to particular groups of consumers.
"A successful FSA investigation would logically impact on those companies primarily selling only to their in-house customers," Deutsche Bank's Oliver Steel wrote in a note to clients. "There is a risk that in-house annuity providers such as Standard Life and Resolution lose out."
A spokesman for Standard Life said: "Buying an annuity is an important decision for people when they come to retire, so we welcome the announcement and will be supporting the FSA in its review"
Edinburgh-based Aegon said: "We fully agree it's important customers know they can and should shop around for the best rate, including any uplift which may be on offer for those with lower than average life expectancy."