Pension providers are being told to be honest about the fact that most customers would be better off shopping around for their annuities.

From this weekend the Financial Services Authority will force the companies to provide detailed information to their customers, enabling them to take their business elsewhere.

What is an annuity ?

An annuity is simply a promise by an insurance company to pay a regular income until the policyholder dies. Anyone who has saved through a personal pension will have to use most of the nest egg they have built up to buy one.

But until now the insurers have been reluctant to explain to people that they might get a much higher income by using their pension savings to buy annuities from other providers.

So it is no surprise that the typical pension saver buys an annuity from the company which managed his or her pension plan. Only 30% take advantage of what is called technically the "open market option".

"On average they would raise their annual income by 8 per cent by exercising their open market option," points out Stuart Bayliss of Annuity Direct, one of several firms which offer advice on which annuities to choose.

Higher rates on offer

Smokers, people with certain medical conditions or living in areas known for lower life expectancy can sometimes find dramatically higher rates on offer from rival insurance companies.

Providers will have to make clear that annuity rates vary and explain to customers how to shop around or get advice. They will have to send out an FSA leaflet with detailed information about the annuity market.

The new rules will have their full impact from January, because insurers tend to give customers 4 months notice of the need to buy an annuity.

Stuart Bayliss expects a 15% increase next year in the number of people exercising their open market option. And that will only be the start.

If that happens it will really make a difference Stuart Bayliss, Annuity Direct

"We've already had indications that banks will be able to offer people in their branches a choice of different annuities and providers," he says, "If that happens it will really make a difference."

At the same time, the FSA is demanding more openness with endowments, policies which have come in for heavy criticism in the last two years.

Millions of people started endowments as a way of paying off their mortgage loans, only to find that the policies had performed so badly that the loans were no longer covered.

Better deal on endowments

From 1st September, disenchanted investors who ask to cash in their endowments early must be told that they could get a better deal by approaching a firm which specialises in trading endowment policies.