A financial watchdog is calling for the urgent reform of the annuities market to prevent “millions of pensioners from losing out”.
After conducting a 12-month study of the market, the Financial Services Consumer Panel said it “does not work well for the majority of consumers”.
Annuities allow people to turn their defined contribution pension savings into retirement incomes.
The panel said it had uncovered evidence of a complex market which is “failing to deliver good outcomes” for many pensioners.
Its report found that retirees could face poor deals if they chose to invest their pension pots with the same companies that they saved their funds through.
Yet shopping around they were faced with a bewildering variety of options, the report said.
Sue Lewis, chair of the Consumer Panel, said: “400,000 annuities are sold each year; this will increase significantly as those who have been auto-enrolled into pension savings reach retirement age.
“The open market option has been around for a long time, but still isn’t working for many people, who are getting less income in retirement than they could.”
She said the panel had seen a shift towards purchasing annunities via “non advice” routes, which offers less consumer protection if things go wrong.
Some online and offshore providers have an “unclear” regulatory status, with evidence of poor conduct including unsolicited emails and telephone calls, according to the report.
“The increase in non-advice sales appears to be driven by light touch regulation and higher profit margins, not consumer demand,” she added.
Ms Lewis called for urgent reform, particularly to protect those with smaller pension pots, who may not be able to obtain independent advice.
“Irreversible mistakes affect retirees for the rest of their lives,” the panel warned.
It concluded: “The chances of mass consumer detriment are, in our judgment, too high to trust to current market-driven solutions alone: hence our recommendations for further regulatory and Government-led structural reform.”
Tom McPhail, head of pensions research at Hargreaves Lansdown, said: “For many people, the retirement process and in particular the purchase of an annuity is one of the most significant financial transactions they will undertake.
“The challenge is to make that process as effective as possible.”
Mr McPhail said shopping around at the retirement for the best rate and the best income “should be the default option for everyone”.
He said more than half of pension pots were worth less than £20,000. Customers with smaller funds find it difficult to obtain paid-for financial advice.
Advisers can instead direct them towards a non-advice product which may pay the advisor a commission.
Pitfalls can potentially include pensions offering good retirement incomes but stopping at death meaning a spouse is left without an income – a drawback which may not be spotted without advice.