Pension providers are to be investigated over claims that Britain's "disorderly" annuity market is depriving many pensioners of a fair retirement income.
The Financial Conduct Authority (FCA) found that in around eight out of 10 cases where people have stuck with their existing pension provider to buy an annuity, they could have been better off financially by shopping around and switching.
It said that currently, around three-fifths (60%) of people stick with their provider, but on average the benefit of switching equates to someone having saved an extra £1,500 into their pension before they retired.
The FCA, which launched a probe into annuities last year, said its findings paint a picture of such a "disorderly market" that it now plans to conduct a competition market study, which will include looking at sales of annuities by pension providers to their existing customers.
The regulator will look for any signs that sales techniques designed to hang onto customers involve putting them off shopping around. If it uncovers any poor practice it will ask firms to make immediate changes.
Annuities are a one-off purchase that people make when they retire, which converts their pension savings pot into a fixed annual income for the rest of their lives.
An array of different annuity types exist, including standard ones that most people tend to get and enhanced annuities, where people in ill health, such as smokers, can get higher payments.
Data analysed by the FCA covered around four-fifths of the 420,000 annuity sales that took place in 2012. Standard annuitants with no medical conditions had an average pension pot of £17,000 and enhanced annuitants had a typical fund of £26,800.
From its research, the FCA estimates that 80% of those purchasing an annuity from their existing pension provider would benefit from shopping around and switching. For standard annuities around 79% of people could get a better deal on the open market, and for enhanced annuities the proportion is 91%.
The FCA found that people buying a standard annuity could boost their annual income by as much as £200 by buying on the open market. On average, switching could make those who would benefit £67 a year better off.
People buying an enhanced annuity could be up to £290 a year better off by buying on the open market. On average, those who stand to gain could increase their annual income by £135.
Meanwhile, those buying a standard annuity when in fact they would be entitled to an enhanced annuity due to ill health could benefit by around £175 a year.
The FCA's report will be published in the next 12 months, which could come up with remedies such as changing rules to shake up competition and placing curbs on the behaviour of some firms.
But Ros Altmann, an independent expert and former Downing Street adviser, said more action should be taken now to halt the "scandal".
She said: "The reason why immediate action is so important is that this market affects so many people and the transactions they are making are irreversible.
"More than 1,000 people every week are buying annuities and the market is worth £14 billion each year."
The FCA said that firms generally expect annuities sold to existing pension customers to be more profitable than business on the open market .
Martin Wheatley, the FCA's chief executive officer, said: "For most people getting the right annuity could mean the equivalent of an extra £1,500 in savings - so we need to understand why they aren't shopping around and switching."
Mr Wheatley said there is "virtually no market whatsoever" for people with smaller pension pots who "need to make every penny of their pension count".
Customers with pension pots under £5,000 have "no real choice" on the open market, the FCA found. Although five annuities were found to be "theoretically" on offer for this size of fund, none was being actively promoted.
The Association of British Insurers (ABI) pointed out that the FCA's review excluded certain customers who stick with their provider because they are getting a better deal than they would elsewhere. It said that when those not included are combined with the 40% of people who already switch providers, overall, 40% of annuitants could benefit from shopping around.
Otto Thoresen, director general of the ABI, said: "W e are finalising a new package of measures to enable people to engage and to shop around for better deals.
"This would include ensuring customers have the right to a conversation to help them understand the difficult decisions at retirement; and how all customers can get a comparison of rates.
"We welcome the FCA's focus on understanding customer behaviour, including why more people do not switch, and we urge the FCA to speed up this important work, involving all those with a role to play in helping customers at retirement, as a year is long time to wait."
Pensions Minister Steve Webb said: "Automatic enrolment means millions more people will be saving into a pension and therefore buying annuities in the coming years.
"This makes taking effective action to ensure that people get value for money from annuities all the more important, and the new FCA review is a welcome and crucial step, as part of the Government's ongoing work on the issue.
"We want to build a fairer society, and that means helping people to get the most out of their hard-earned pensions savings when they retire."
Richard Lloyd, executive director of consumer group Which? said: " Action is urgently needed in the annuities market to help people get the best possible income in their retirement so we welcome this market investigation.
"But the regulator must be clear that they will not tolerate providers treating their customers unfairly by offering poor rates and effectively burning years of people's hard-earned pension contributions.
"Rather than profiting from people's inertia, we want all providers to proactively publish their rates to increase transparency in the market and encourage consumers to shop around."