Many pensioners are missing out on thousands of pounds of year in income because they are being sold poor value annuities that don’t best meet their needs, the City watchdog said.

In a much anticipated report into retirement income the Financial Conduct Authority concluded that the annuity market is not working as well as it could for consumers, particularly for those reaching retirement suffering from ill health. Around 353,000 people were buying annuities every year in a market worth £12bn in 2013, according to the Association of British Insurers, but the numbers are falling fast now that pensioners will no longer be forced into buying one from April 2015.

The FCA concluded that the sales of enhanced annuities, which offer a higher income to people with a lower life expectancy, were particularly poor value with firms failing to tell people to shop around for the best rate or, worse, failing to tell them about the product altogether.

It also concluded that many thousands more people in good health were also missing out on a higher income in retirement because they were failing to shop around for the best annuity rate. It concluded that sales practices were contributing to this lack of shopping around and switching.

The report comes four months ahead of major pensions reforms which will mean savers can do what they like with their retirement pots and will no longer be forced to buy an annuity.

“The budget reforms are a game changer for the retirement income market. People will be given more choice and many will want some support to ensure they make the right decisions for them,” said Christopher Woolard, director of policy, risk and research at the FCA.

“We want to see firms improving the way they communicate with their customers. In order for the pension reforms to work and for people to have trust and confidence in the products they are buying firms need to act now.”

Although the FCA identified major failings with annuity sales in some cases, it stopped short of identifying the major mis-selling some had expected. It added that for people with average sized pension pots and low risk appetite, the right annuity purchased on the open market might be better than the alternative, pension drawdown.

It recommended four improvements to sales practices including a requirement that firms make it clear to consumers how their quote compares to others on the open market.

The difference in rates can be significant, particularly in the case of an enhanced versus standard annuity. A 65-year-old could receive an income of £2,536 a year with a standard annuity today or £3,298 a year with an enhanced annuity from a pension pot of £50,000, according to retirement solutions provider, MGM Advantage. Over the course of this retirement, the difference in income is £16,002, or 30%.

The FCA also suggested an alternative to the system of “wake-up packs”, the hundreds of pages of literature sent by insurers to their customers six months before their retirement dates.

It also wants to introduce a “pensions dashboard”, which would allow consumers to view all their lifetime pensions savings in one place.

Richard Lloyd, Which? executive director, welcomed the findings of the review and the FCA proposals.

“Consumers have been repeatedly let down by the pensions industry, with years wiped off people’s hard-earned savings, so it’s welcome to see the FCA working with the industry to clean up mistakes from the past,” he said.

“The regulator’s proposals to ensure consumers have better information when they make big decisions about their income at retirement are sensible. But action is long overdue and the regulator and industry must now quickly put in place changes to ensure retirement products offer true value for money.”

Source: Guardian