Annuity providers will be required to inform their customers how much they could gain from shopping around and switching provider before they purchase an annuity, the Financial Conduct Authority (FCA) says.
The regulator plans to ask providers to build an "annuity comparator" tool, in the form of an information prompt before an annuity is purchased.
The prompt will have to show the difference between the provider's own quote and the highest quote available to the consumer from all other providers on the open market.
Firms will be required to give consumers details of whether the annuity is a single or joint life product, whether the rate of income paid by the annuity is guaranteed and the total pot that will be used to buy the annuity.
They will be required to deliver the information in a personalised form in a format set out by the FCA.
The measure was first recommended by the FCA's Retirement Income Market Study in July, which had found 60% of customers were not switching providers when they bought an annuity and up to 80% of them could have got a better deal on the open market.
FCA executive director of strategy and competition Christopher Woolard said: "Although sales have declined since the pension freedoms were introduced, annuities still play a significant role in retirement provision. It's important that consumers shop around to get the best deal for them - yet our previous work found that very few people actually did so.
"We believe that the proposals we have outlined today will engage consumers and allow them to make better decisions, increasing shopping around and competition across the market."
Most Effective Format
The FCA said it had tested various information and formats to understand which worked best to encourage consumers to shop around.
It found showing consumers the annual increase in income they could gain from purchasing an annuity on the open market was particularly effective.
Tests had revealed a 25% increase in the number of participants moving on to compare products from different providers after they were shown the contrasting figures.
The regulator proposed the new rules should come into force in September 2017.
Meanwhile, it has also announced plans to create two new regulatory returns for providers, which will collect detailed information about retirement product sales as well as the use of advice.
A Positive Step
Just Retirement group communications director Stephen Lowe welcomed the annuity comparator tool but said more needed to be done.
He said: "The failure of some providers to explain the benefits to consumers of shopping around when purchasing a guaranteed income for life product has been a longstanding problem.
"The FCA is taking positive steps to address this problem, but we think there is a strong case to go further and make it a requirement for all purchases to be made via the open, external market to ensure consumers get the best deal."
Similarly, AJ Bell senior analyst Tom Selby said: "The effectiveness of this measure will depend on the extent to which consumers actually read and react to the information provided, so policymakers must closely monitor how shopping around figures change following its implementation."
Selby said the decision by several major providers to pull out of the open annuity market since the pension freedoms were announced in 2014 had raised "serious concerns" about a lack of competition in the market.
"Arming people with information about annuity deals available elsewhere should help redress the competitive balance in the annuity market and hold insurers' feet to the fire when it comes to pricing," he said.
"This is a welcome move by the FCA."
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