The market for retirement income is failing, with many consumers missing out on a higher income by not shopping around, the FCA has concluded.
The regulator published its retirement income market study interim report this morning, which echoed many of the concerns it had previously outlined in a thematic review.
The report stated: "This market study found that competition in the retirement income market is not working well for consumers.
"Consistent with previous findings of the thematic review of annuities in
February 2014, many consumers are missing out on a higher income by not shopping around for an annuity, and some do not purchase the best annuity for their circumstances.
"We found a common perception among consumers that annuities offer poor value, as reflected in media coverage.
{desktop}{/desktop}{mobile}{/mobile}
"This is despite the fact that our economic analysis has shown that for people with average-sized pension pots, the right annuity purchased on the open market offers good value for money relative to alternative drawdown strategies and may therefore be a good option for those with low risk appetites."
Officials said they found various reasons for consumers not exercising their open market option.
One in five of those who purchased an annuity with their existing pension provider were unaware that they had the option to switch, they found, while others were deterred from engaging with their options by the length and complexity of the 'wake-up packs' sent out by providers or because they did
not believe that the sums involved made it worthwhile.
The report said: "Our thematic review findings suggest that providers' verbal communications with their customers do not go as far as they should to encourage shopping around.
"Consumers' tendency to buy from their existing pension provider weakens competitive discipline. Not only do incumbent providers feel less pressure to offer competitive vesting rates, but challengers find it difficult to attract a critical mass of consumers.
"As a result there has been limited new entry into the decumulation market in recent years. Our research confirmed that pension savers display well-known biases, such as a tendency to under-estimate longevity, inflation and investment risk.
"We also found that the choices savers make are highly sensitive to how the options are presented (framing effects), which means that consumers may make different decisions, even when the underlying choice remains the same,
depending on the way the information is provided."
The FCA expects more hybrid products to emerge, combining annuity and
drawdown features.
It warned though that greater choice and more complex products will reduce consumers' "confidence and appetite to shop around and thus weaken competitive pressure to offer good value in this market".
Savers could be "vulnerable to being sold products which do not best meet their needs", it added.